IRS Nixes Dividend Deduction for Foreign Affiliate (Correct)

Dividends that a US corporation’s foreign subsidiary receives from another foreign corporation in which it owns a minority stake are not deductible, the IRS says.

The Section 245A “dividends received deduction” allows US companies tax-free treatment on foreign-source dividends received from a foreign corporation under certain circumstances. But the “plain language” of the section rules out deductibility in this case, the IRS Office of Chief Counsel said in a July 31 memo that was made public Friday.

The case examined in the memo concerns a US company that owns a controlled foreign corporation—a foreign corporation more than 50%-owned by ...