FOREIGN TAX CREDIT
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FOREIGN TAX CREDIT

The foreign tax credit intends to reduce the double tax burden that would otherwise arise when foreign source income is taxed by both the United States and the foreign country from which the income is derived.

The tax must meet four tests to qualify for the credit:

  • The tax must be a legal and actual foreign tax liability

  • The tax must be imposed on you

  • You must have paid or accrued the tax, and

  • The tax must be an income tax (or a tax in lieu of an income tax)

 

Generally, only income taxes paid or accrued to a foreign country or a U.S. possession (also referred to as a U.S. territory), or taxes paid or accrued to a foreign country or U.S. possession in lieu of an income tax, will qualify for the foreign tax credit.

The domestic corporation now receives a 100-percent deduction for the foreign-source portion of the dividends received from the foreign corporation subject to a one year holding period. The law allows no foreign tax credit or deduction for any foreign taxes paid or accrued on the qualifying dividend.

(Refer to Form 1118 Foreign Tax Credit—Corporations, Form 1116 Foreign Tax Credit (Individual, Estate, or Trust))