The IRS released proposed regulations (REG-114540-18
) that have the effect of extending the dividends received deduction (DRD) to a domestic corporate U.S. shareholder otherwise experiencing a Section 956 inclusion.
The proposed rules come in response to the participation exemption system under Section 245A, which was enacted by the Tax Cuts and Jobs Act. Under the participation exemption system, most earnings of certain foreign corporations that are repatriated to a corporate U.S. shareholder as a dividend are effectively exempt from taxation by virtue of an offsetting DRD under Section 245A. A Section 956 inclusion of a corporate U.S. shareholder, however, is not eligible for the DRD. The proposed regulations look to restore balance between actual dividends and amounts deemed “substantially the equivalent of a dividend” by reducing amounts subject to Section 956 if they otherwise qualify for the DRDs under Section 245A.
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