8957 / How are dividends from a foreign corporation taxed when they are received by a domestic corporation?

Dividends received by a domestic corporation which owns at least 10 percent of a foreign corporation are subject to a domestic corporation deduction only to the extent that the dividends are deemed attributable to U.S. source income of the foreign corporation. This is computed by applying to the dividends received a ratio equal to the ratio of U.S. source income to total income of the foreign corporation. Once the U.S.-source portion is determined, the deduction is then limited, depending on the percentage ownership of the foreign corporation. If the domestic corporation owns at least 10 percent, but less than 20 percent, the deduction is 50 percent (70 percent prior to 2018) of the U.S.-source portion of the dividends received. If the percentage ownership is at least 20 percent, the portion deductible increases to 65 percent (80 percent prior to 2018) of the U.S.-source dividends received.

A 100 percent deduction is allowed for dividends received from a foreign wholly-owned subsidiary of a domestic corporation, provided that all of the subsidiary’s income is effectively connected with a U.S. trade or business. Special rules apply in the case of dividends received from certain foreign sales corporations (FSCs).¹

1. IRC § 245.