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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4380
Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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Hello, I have this situation:Two US corporations, incorporated

Customer Question

Hello,
I have this situation:
Two US corporations, incorporated in Wyoming and in California, owns several companies in Bulgaria and 1 in Mexico. They own always more than 51% of the shares. The companies conduct consulting services in Europe in Mexico. The only activity of the US corporations is to hold the shares, so there is no economic activity in US or anywhere - like holdings. The owner of the US corporations is a PAnama private interest foundation. So, the US corporations receive dividends and distribute them to the PAnama foundation.
How must be taxed these dividends - when US corporations receive them from Bulgarian and Mexican companies and when distribute them to Panama foundation.
Submitted: 1 year ago.
Category: Tax
Expert:  socrateaser replied 1 year ago.
You are describing the very thing that the U.S. Senate has been holding hearings about with Apple Chairman XXXXX XXXXX this last week.

In general, income repatriated from a foreign corporation to a U.S. corporation is taxable at the U.S. corporation's tax rates.

In addition, Subpart F Income from a Controlled Foreign Corporation (CFC) (i.e., a corporation of which more than 50% is owned by U.S. shareholders (IRC 953(a)), is also taxable to the U.S. corporation even if it is not repatriated from the foreign corporation.

The issue of what is and is not Subpart F income is incredibly complex. This link from the IRS describes the issue from the auditor's perspective. If you can satisfy the audit requirements, then you can distinguish between what is and is not Subpart F income subject to U.S. tax, regardless of whether or not it is repatriated.

Hope this helps.
Expert:  socrateaser replied 1 year ago.

What's wrong with the answer?

Customer: replied 1 year ago.

The issue was about the tax treaties between Bulgaria / Mexico and US and also about the 4% tax on the dividends distributed to Panama foundation.

Expert:  socrateaser replied 1 year ago.

I don't see anything in your original question concerning treaties -- nor anything about a 4% tax. The only thing I see is a statement about 51% ownership, which suggested to me that you were interested in dealing with controlled foreign corporation issues.

Given our apparent total miscommunication, I will open the question for others to assist you further.

Best of luck with your taxing issues.

Expert:  Lane replied 1 year ago.

This is how:

(a) Dividends from 10-percent owned foreign corporations
(1) In general
In the case of dividends received by a corporation from a qualified 10-percent owned foreign corporation, there shall be allowed as a deduction an amount equal to the percent (specified in section 243 for the taxable year) of the U.S.-source portion of such dividends.
(2) Qualified 10-percent owned foreign corporation
For purposes of this subsection, the term “qualified 10-percent owned foreign corporation” means any foreign corporation (other than a passive foreign investment company) if at least 10 percent of the stock of such corporation (by vote and value) is owned by the taxpayer.
(3) U.S.-source portion
For purposes of this subsection, the U.S.-source portion of any dividend is an amount which bears the same ratio to such dividend as—
(A) the post-1986 undistributed U.S. earnings, bears to
(B) the total post-1986 undistributed earnings.
(4) Post-1986 undistributed earnings
For purposes of this subsection, the term “post-1986 undistributed earnings” has the meaning given to such term by section 902 (c)(1).
(5) Post-1986 undistributed U.S. earnings
For purposes of this subsection, the term “post-1986 undistributed U.S. earnings” means the portion of the post-1986 undistributed earnings which is attributable to—
(A) income of the qualified 10-percent owned foreign corporation which is effectively connected with the conduct of a trade or business within the United States and subject to tax under this chapter, or
(B) any dividend received (directly or through a wholly owned foreign corporation) from a domestic corporation at least 80 percent of the stock of which (by vote and value) is owned (directly or through such wholly owned foreign corporation) by the qualified 10-percent owned foreign corporation.
(6) Special rule
If the 1st day on which the requirements of paragraph (2) are met with respect to any foreign corporation is in a taxable year of such corporation beginning after December 31, 1986, the post-1986 undistributed earnings and the post-1986 undistributed U.S. earnings of such corporation shall be determined by only taking into account periods beginning on and after the 1st day of the 1st taxable year in which such requirements are met.
(7) Coordination with subsection (b)
Earnings and profits of any qualified 10-percent owned foreign corporation for any taxable year shall not be taken into account under this subsection if the deduction provided by subsection (b) would be allowable with respect to dividends paid out of such earnings and profits.
(8) Disallowance of foreign tax credit
No credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to the United States-source portion of any dividend received by a corporation from a qualified 10-percent-owned foreign corporation.
(9) Coordination with section 904
For purposes of section 904, the U.S.-source portion of any dividend received by a corporation from a qualified 10-percent owned foreign corporation shall be treated as from sources in the United States.
(10) Coordination with treaties
If—
(A) any portion of a dividend received by a corporation from a qualified 10-percent-owned foreign corporation would be treated as from sources in the United States under paragraph (9),
(B) under a treaty obligation of the United States (applied without regard to this subsection), such portion would be treated as arising from sources outside the United States, and
(C) the taxpayer chooses the benefits of this paragraph,
this subsection shall not apply to such dividend (but subsections (a), (b), and (c) ofsection 904 and sections 902, 907, and 960 shall be applied separately with respect to such portion of such dividend).
(11) Coordination with section 1248
For purposes of this subsection, the term “dividend” does not include any amount treated as a dividend under section 1248.
(b) Certain dividends received from wholly owned foreign subsidiaries
(1) In general
In the case of dividends described in paragraph (2) received from a foreign corporation by a domestic corporation which, for its taxable year in which such dividends are received, owns (directly or indirectly) all of the outstanding stock of such foreign corporation, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends.
(2) Eligible dividends
Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which—
(A) all of its outstanding stock is owned (directly or indirectly) by the domestic corporation to which such dividends are paid; and
(B) all of its gross income from all sources is effectively connected with the conduct of a trade or business within the United States.
(3) Exception
Paragraph (1) shall not apply to any dividends if an election under section 1562 is effective for either—
(A) the taxable year of the domestic corporation in which such dividends are received, or
(B) the taxable year of the foreign corporation out of the earnings and profits of which such dividends are paid.
(c) Certain dividends received from FSC
(1) In general
In the case of a domestic corporation, there shall be allowed as a deduction an amount equal to—
(A) 100 percent of any dividend received from another corporation which is distributed out of earnings and profits attributable to foreign trade income for a period during which such other corporation was a FSC, and
(B) 70 percent (80 percent in the case of dividends from a 20-percent owned corporation as defined in section 243(c)(2)) of any dividend received from another corporation which is distributed out of earnings and profits attributable to effectively connected income received or accrued by such other corporation while such other corporation was a FSC.
(2) Exception for certain dividends
Paragraph (1) shall not apply to any dividend which is distributed out of earnings and profits attributable to foreign trade income which—
(A) is section 923 (a)(2) nonexempt income (within the meaning of section 927 (d)(6)), or
(B) would not, but for section 923 (a)(4), be treated as exempt foreign trade income.
(3) No deduction under subsection (a) or (b)
No deduction shall be allowable under subsection (a) or (b) with respect to any dividend which is distributed out of earnings and profits of a corporation accumulated while such corporation was a FSC.
(4) Definitions
For purposes of this subsection—
(A) Foreign trade income; exempt foreign trade income
The terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923.
(B) Effectively connected income
The term “effectively connected income” means any income which is effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States and is subject to tax under this chapter. Such term shall not include any foreign trade income.
(C) FSC
The term “FSC” has the meaning given such term by section 922.
Expert:  Lane replied 1 year ago.


Sorry, meant to provide the citation.

As you can see there are several caveats.

For the dividend received deduction the paying company must be taxed, as THAT particular deduction is designed to eliminate double taxation.

10% ownership, by the means 10% or greater.

26 USC § 245




If this HAS helped, I would appreciate a feedback rating of 3 (OK) or better. That's the only way they will pay us here

If you need more, however, come back here so as not to pay for another question.

Thanks
Lane
Customer: replied 1 year ago.

Dear Sir,


 


Thanks. But I also can read all this information on the thousands pages of publications and ruse of IRS. And I did. But the problem is with the interpretation. And got lost. That was the reason to send my question here. I am not tax advisor, neither attorney. I do business.


 


The question is very simple. The US corporations own several companies in Bulgaria and Mexico. They don't have any other activities, only holds the shares. The activities of the companies in Bulgaria and Mexico don't have any connection with US (no US clients, etc.). The minimum % of the shares they hold is 51 in each company. Must they deduct the received dividends from their taxable income in US or not?


And the second question is again very simple: How much US corporations must withhold from the dividends they pay to their only shareholder - a Panama foundation. 4% or 30/35%?


 


So, can you answer shortly to those 2 questions or not?


 


Thanks and have a great night!

Expert:  Lane replied 1 year ago.


This is not thousands of pages.

This is the applicable law ... less than one page; 26 USC § 245

Again, US corporations pay tax on dividends received, REGARDLESS of, as you say, "They don't have any other activities, only holds the shares. The activities of the companies in Bulgaria and Mexico don't have any connection with US (no US clients, etc.). The minimum % of the shares they hold is 51 in each company"

 

US CORPORATIONS PAY TAX ON DIVIDENDS RECEIVED.

When those dividends are received from foreign corporations, then you MAY have deductions, provided by the respective tax treaty IF (1) you elect that treatment and (2) section 1248 does not apply.

 

 

 



See this section from the small section of code above:

"(10) Coordination with treaties
If—


(A) any portion of a dividend received by a corporation from a qualified 10-percent-owned foreign corporation would be treated as from sources in the United States under paragraph (9),


(B) under a treaty obligation of the United States (applied without regard to this subsection), such portion would be treated as arising from sources outside the United States, and


(C) the taxpayer chooses the benefits of this paragraph,"

You need to see a good tax attorney,well versed in corporate tax law, international tax law and the respective tax treaties that apply.



Short answers?

Yes they can deduct, if the treaty is elected, applies and correct forms are filed.

Withholding is at 35% UNLESS the tax treaty treatment is elected. The the rate that applies will be one of 2 things (1) AT the rate specified by the treaty or (2) none at all where withholding can be waived as per the treaty.



Correct answers?

Pay the appropriate amount of professional fees to a tax attorney, well versed in corporate taxation, international taxation and the respective tax treaties as they apply.

This is really not the appropriate venue for this question. Further, my apologies, but it appears to me that you are asking questions with flawed assumptions.

Further you will have to provide MUCH more information than you have ... OR could here.

You need to sit down and pull through this with a competent tax attorney for this. This will be an individual that will charge (depending on region) 250 to 500 per hour.

You are probably asking your question in the wrong venue.

 

 

 

 

If you want to read the respective treaties, and come back here to ask some clarifying questions, that would be more appropriate to this venue. The price you are paying her is FAR underpriced, and even getting close to the correct answer will take some dialogue.

 

This is NOT a simple question.

 

 

 

Customer: replied 1 year ago.

OK, thank you. I will follow your advice and I´m going to some good attorney! Now I understand that the question is complicated. But why you didn't tell me that in the beginning and we both had to waste our time? And how do you want me to be satisfied. The people needs to be honest and not to be only focused on how to make money (even only $30).


Good luck!

Customer: replied 1 year ago.

He told me to find an attorney because my question was not for this venue. OK. I will follow his advice!

Expert:  Lane replied 1 year ago.

Thant's correct.

However, rating two different people's advice as bad, one man's opinion, didn't help anyone.

I gave you the appropriate tax citation and even the specific section of code that applies to your situation.

Hopefully this will help the charges from a good attorney not be as bad, given that we have doe the basic research

Good luck with everything!

Lane
Customer: replied 1 year ago.

Deat Lane,


 


I understand your point - you did some job, you have lost some time but this is not my fault. Try to understand it. I am very positive and I am telling this to you only because I would like to be very clear. I am businessman, I am not attorney, neither cpa. So, I don't need this citation because I cannot interpret it. If I could maybe I should be able to answer myself to my question. I found this website, I liked it and decided to put my question. The website defines the price, not me. And if you see that the question is too complicated and requires a lot of time you just should tell me. This is my point.


 


Good luck!

Expert:  Lane replied 1 year ago.

Thanks for that.

Again, only offered up that the citations and short piece of statute law might be a place to start with an attorney.

And, must admit that your rating of the first expert here, who opted out after realizing with your response that your first question, "How must be taxed these dividends - when US corporations receive them from Bulgarian and Mexican companies and when distribute them to Panama foundation." ...

... and your second questions were two different questions,

made me a little wary.

Again, between the information I provided and the information provided by the other expert you DO have an opportunity to make an engagement with an attorney more efficient now.

Good Luck

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Lane
Lane
Tax Professional
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Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986