Magazine article The CPA Journal

Repatriated Dividends Encouraged under the American Jobs Creation Act

Magazine article The CPA Journal

Repatriated Dividends Encouraged under the American Jobs Creation Act

Article excerpt

IRC section 965, created under the American Jobs Creation Act of 2004 (AJCA), allows U.S. companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate. IRC section 965 provides that U.S. companies may elect, for one taxable year, to receive an 85% deduction for eligible dividends from their foreign subsidiaries. The election applies to actual cash dividends, not to any deemed dividends or foreign tax credit gross-ups. Distributions of previously taxed income, with certain exceptions, are excluded.

The dividend eligible for the deduction is limited to the greatest of 1) $500 million; 2) the earnings shown as permanently invested outside the U.S. on the most recently audited financial statements certified before July 1, 2003; or 3) in the case of a financial statement that fails to show a specific earnings amount but does show a specific tax liability attributable to such earnings, an amount equal to the tax liability divided by 0.35 (i.e., the liability is grossed up).

Reinvestment Required

For the dividends to qualify for the repatriation dividends-received deduction (repatriation DRD), they must be invested in the United States under a properly approved domestic reinvestment plan [IRC section 965(b)(4)]. Eligible taxpayers can elect to claim the deduction from either the last tax year that begins before October 22, 2004, or the first tax year that begins during the one-year period commencing on October 22, 2004.

The dividend must be extraordinary. The dividend cannot exceed the excess of all dividends received during the tax year from the controlled foreign company over the annual average for the base period years of 1) dividends received during each base-period year from the controlled foreign company; 2) amounts included in the U.S. shareholder's gross income for each base-period year under ERC section 951(a)(1)(B) for increases in investments in U.S. property by the controlled foreign company; and 3) amounts that would have been included for each base-period year for the controlled foreign company but for IRC section 959(a) (nontaxable distributions of previously taxed income). Base-period years are defined as three of the five most recent tax years ending before July 1, 2003, excluding the years with the highest and lowest of actual and deemed distributions. The dividend cannot be financed by related-party loans.

The repatriated dividends that are eligible for the reduced tax rate must be reinvested by the company in the United States pursuant to a domestic reinvestment plan approved by the company's president and CEO as well as approved by the company's management committee or board of directors before the funds are repatriated. …

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