International Tax Watch

A Closer Look at the Election Under the Code Sec. 245A Temporary Regulations The heart of the territorial system of taxation introduced in the Tax Cuts and Jobs Act ("TCJA") is Code Sec. 245A, which provides a dividends received deduction for certain amounts foreign subsidiaries distribute to a qualifying domestic corporation (the "Section 245A DRD"). The Temporary Regulations are effective as of their June 14, 2019 issuance date and apply retroactively to distributions that occur after December 31, 2017.2 This column does not seek to address whether any super-statutory spirit of international tax law animates the individual provisions of the Code, nor do we examine whether Treasury correctly interpreted any such principles in the Temporary Regulations. Generally, if a domestic corporation that is a U.S. shareholder with respect to an SFC receives a dividend from the SFC, the Section 245A DRD applies only to the extent of the "foreign-source portion" of the dividend.4 An SFC is any foreign corporation with respect to which any domestic corporation is a U.S. shareholder within the meaning of Code Sec. 957(c).5 Foreign corporations that are passive foreign investment companies, as defined in Code Sec. 1297, but that are not also CFCs do not count as "foreign corporations" for this purpose. No credit or deduction is allowed for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which a Section 245A DRD is allowed.7 The Section 245A DRD is not available for "hybrid dividends" received by a U.S. shareholder.8 For this purpose, a "hybrid dividend" means an amount received from an SFC for which: (A) but for the hybrid dividend rule, a Section 245A DRD would have been allowed; and (B) the SFC received a deduction (or other tax benefit) with respect to any income, war profits, or excess profits taxes imposed by any foreign country or U.S. possession.9 Even though the Section 245A DRD is not available for hybrid dividends, no credit or deduction is allowed for any foreign taxes paid or accrued with respect to a hybrid dividend.10 To qualify for the Section 245A DRD, the U.S. shareholder must satisfy the one-year holding period requirement in Code Sec. 246(c)(5), as amended by the TCJA.11 To claim a Section 245A DRD, the taxpayer must have been a U.S. shareholder for more than 365 days during the 731-day period beginning on the date that is 365 days before the date on which the share becomes ex-dividend with respect to the divi