The “Tax Cuts and Jobs Act” (the “Act”) contains a provision that is a “sister companion” to the Deduction for Dividends Received (DRD) that involves sales or transfers that involve specified 10% ownership in foreign corporations.
In order to accompany the deduction allowed for foreign source dividends (DRD), the Act contains a provision requiring a U.S. Corporation to reduce the basis of its stock in a foreign subsidiary by the amount of any exempt dividends received by the U.S. Corporation from its foreign subsidiary. This is only allowed for determining losses and not gains. What this means is that amounts realized by a U.S. Corporate shareholder with at least a 10% ownership in a foreign corporation on a sale of foreign subsidiary stock will be treated as dividend income - to the extent of foreign earnings and profits. The remainder of the amount realized is usually a capital gain.
In order to determine the amount of a loss on the sale of foreign stock in a certain foreign entity by a U.S. Corporate shareholder that has a 10% ownership in that foreign entity, such shareholder's basis in the foreign corporation stock is reduced by an amount equal to the portion of any dividend received with respect to the foreign stock that was not taxed in the U.S. as a result of the new DRD.
Moreover, If the U.S. Corporation transfers assets of a foreign branch to a foreign subsidiary corporation, and there is a “loss”, the “loss must be included in the U.S. Corporation’s gross income. Before the Act, the Corporation would either owe U.S. taxes on the foreign earnings or deducts losses as though they accrued directly to the U.S. Corporation.
The provisions are effective for distributions or transfers made after 2017.
Don’t be a victim of your own making. If you are a Corporate Taxpayer with a 10% ownership in foreign stock, consult your tax specialist and learn the Special Rules Relating to Sales or Transfers of 10% U.S.-Owned Foreign Stock.