IRS Provides Initial Guidance On The New Temporary Dividends Received Deduction

The Treasury Department and Internal Revenue Service on January 13 issued guidance (Notice 2005-10) for U.S. companies planning to repatriate earnings from controlled foreign corporations (CFC’s) qualifying for the temporary special deduction under the American Jobs Creation Act (AJCA), enacted in October 2004.

The following outlines important highlights.

New section 965 of the Code allows U.S. companies to elect, for one taxable year, an 85% dividends received deduction (DRD) for eligible "cash dividends" received from their CFC’s, subject to certain limitations. The company must invest the repatriated cash in the United States pursuant to a domestic reinvestment plan approved by top management prior to the repatriation. The DRD results in dividends from a foreign subsidiary being taxed at an effective maximum U.S. federal income tax rate of 5.25%.