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What tax form is filed to report dividends paid by US Corp?

You will report this on the Form 1042. In addition, the Form 1042-S has to be filed as well. See below:

Including a wide variety of income, FDAP income is defined under Sec. 871(a)(1)(A) as “interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, or emoluments. FDAP income is not subject to the 30% gross basis withholding tax if it is derived from the conduct of a U.S. trade or business. In that event, the income is subject to tax as ECI taxable at graduated rates after the deduction of relevant expenses.

Form 1042: U.S. withholding agents must generally file tax and information returns with the IRS to report FDAP income paid to foreign payees along with any tax withheld on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

Form 1042-S: In addition to Form 1042, a withholding agent must file Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, with the IRS for every foreign payee with respect to which it paid FDAP income. On each Form 1042-S, the withholding agent must indicate the amount of each category of income paid to the foreign payee (e.g., dividends, interest, etc.) and the amount of tax withheld. A separate Form 1042-S must be filed for each payee and each type of income. Note that if the withholding agent did not withhold tax on FDAP income because it was exempt from withholding tax under a relevant income tax treaty, the withholding agent still must file Form 1042-S. A copy of Form 1042-S should be sent to the foreign payee and attached to any U.S. income tax return that the payee files.

Reference Source

https://www.thetaxadviser.com/issues/2013/apr/clinic-story-05.html

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What tax form is filed to report dividends paid by a US Corp which is owned by a Canadian Corp? I think it might be 1042S. I want to know the rate of WH.

Submitted: 10 months ago.
Answered in 2 hours by:
9/19/2017
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Q: what tax form is filed to report dividends paid by a US Corp which is owned by a Canadian Corp?

A: You are correct. You will report this on the Form 1042. In addition, the Form 1042-S has to be filed as well. See below:

Including a wide variety of income, FDAP income is defined under Sec. 871(a)(1)(A) as “interest, dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, or emoluments. FDAP income is not subject to the 30% gross basis withholding tax if it is derived from the conduct of a U.S. trade or business. In that event, the income is subject to tax as ECI taxable at graduated rates after the deduction of relevant expenses.

Form 1042:U.S. withholding agents must generally file tax and information returns with the IRS to report FDAP income paid to foreign payees along with any tax withheld on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons.

Form 1042-S: In addition to Form 1042, a withholding agent must file Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, with the IRS for every foreign payee with respect to which it paid FDAP income. On each Form 1042-S, the withholding agent must indicate the amount of each category of income paid to the foreign payee (e.g., dividends, interest, etc.) and the amount of tax withheld. A separate Form 1042-S must be filed for each payee and each type of income. Note that if the withholding agent did not withhold tax on FDAP income because it was exempt from withholding tax under a relevant income tax treaty, the withholding agent still must file Form 1042-S. A copy of Form 1042-S should be sent to the foreign payee and attached to any U.S. income tax return that the payee files.

Reference source:

https://www.thetaxadviser.com/issues/2013/apr/clinic-story-05.html

The W/H rate is 30%. See below:

FDAP & ECI. ECI and FDAP are subject to two different tax regimes. FDAP is taxed on a gross basis (gross income without deductions) at 30 percent whereas ECI is taxed on a net basis (gross income less allowable deductions) at graduated rates. The 30 percent tax rate on FDAP may be reduced (or eliminated) pursuant to an income tax treaty or under domestic law. Although not the focus of this concept unit, it is important to note that the 30% tax on FDAP income is collected by withholding at the source. Accordingly, the payer of the FDAP income is required to withhold and remit this tax to the IRS. The person who withholds and pays the tax is often referred to as the withholding agent.

Reference source:

https://www.irs.gov/pub/int_practice_units/RPWCUP_081_02.pdf

Page 3

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Customer reply replied 10 months ago

US Corp is 100% earned by Canada Corp. US Corp has built up earnings over many years which are considered ECI & wants to pay Canada Corp $500,000. What is the lowest rate of US WH?

Under most of its treaties, the United States may not tax the business profits of a treaty country resident generated in the United States, unless such business is carried on through a permanent establishment (“PE”) located in the United States. If a PE exists, the business profits may be taxed only to the extent they are attributable to the US PE.

Reference source:

https://www2.deloitte.com/content/dam/Deloitte/us/Documents/Tax/us-tax-introduction-to-taxation-of-foreign-investment-071515.pdf

(Bottom Page 9)

Corporate taxable income varies from 15% to 35%.

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Customer reply replied 10 months ago

In the following chart it appears the WH rate for dvds pd to Canadian parent should be 15% (column 1) or 5% (column 2) see http://taxsummaries.pwc.com/ID/United-States-Corporate-Withholding-taxes Top of Page 4 of the following under "subsidiary" it also mentions the 5% rate. http://www.andersentax.com/uploads/file_attachments/Foreign_Owned_US_Operations_Guide.pdf Obviously we are interested in paying the lowest rate but I want to be correct. You mentioned 30% but there seem to be many legitimate exceptions. The US subsidiary has paid the corp tax rates you mentioned 15% to 35% but these accumulated earnings are going to be sent to the Canadian parent as a dividend.

The tax treaty between the U.S. and Canada states the following regarding dividends.

2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State; but if a resident of the other Contracting State is the beneficial owner of such dividends, the tax so charged shall not exceed: (a) 10 per cent of the gross amount of the dividends if the beneficial owner is a company which owns at least 10 per cent of the voting stock of the company paying the dividends; (b) 15 per cent of the gross amount of the dividends in all other cases. This paragraph shall not affect the taxation of the company in respect of the profits out of which the dividends are paid.

Reference source:

https://www.irs.gov/pub/irs-trty/canada.pdf

Article X

Based on this information, I would say 10% is the lowest tax rate.

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Customer reply replied 10 months ago

So if a $500,000 dividend is paid and 10% is WH and sent to IRS what is the timing for 1. remittance of the 50,000 WH 2. filing of forms 1042

When to file form 1042 AND 1042-S:

No later than March 18, 2018

Deposit Requirements You are required to use the Electronic Federal Tax Payment System (EFTPS), discussed later, to deposit the tax withheld and required to be shown on Form 1042 (regardless of whether withholding was applied under chapter 3 or 4 or with respect to a specified federal procurement payment).

1. If at the end of any quarter-monthly period the total amount of undeposited taxes is $2,000 or more, you must deposit the taxes within 3 business days after the end of the quarter-monthly period. (A quarter-monthly period ends on the 7th, 15th, 22nd, and last day of the month.) A business day is any day other than a Saturday, Sunday, or legal holiday in the District of Columbia. 2. If at the end of any month the total amount of undeposited taxes is at least $200 but less than $2,000, you must deposit the taxes within 15 days after the end of the month. If you make a deposit of $2,000 or more during any month except December under rule 1, earlier, carry over any end-of-the-month balance of less than $2,000 to the next month. If you make a deposit of $2,000 or more during December, any end-of-December balance of less than $2,000 should be remitted with your Form 1042 by March 15, 2017. 3. If at the end of a calendar year the total amount of undeposited taxes is less than $200, you may either pay the taxes with your Form 1042 or deposit the entire amount by March 15, 2017.

Reference sourcde:

https://www.irs.gov/pub/irs-pdf/i1042.pdf

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