US OWNERS OF FOREIGN ENTITIES
Reading a Newspaper

U.S. SHAREHOLDERS OF FOREIGN CORPORATIONS

 

U.S. shareholders of CFC

Under the law, a U.S. person that has control or owns at least 10 percent (directly, indirectly, or constructively) of the value or voting rights in one or more controlled foreign corporations will be required to include its global intangible low-taxed income as currently taxable income, regardless of whether any amount is distributed to the shareholder.

Generally, a U.S. person is:

1. A citizen or resident of the United States,

2. A domestic partnership,

3. A domestic corporation, and

4. An estate or trust that is not a foreign estate or trust.

 

CFC

 A CFC is a foreign corporation that has U.S. shareholders that own (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) on any day of the tax year of the foreign corporation, more than 50% of:

1. The total combined voting power of all classes of its voting stock; or

2. The total value of the stock of the corporation. U.S. shareholder.

(Refer to Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), Form, 8993 Section 250 Deduction for Foreign-Derived Intangible Income (FDII) and Global Intangible Low-Taxed Income (GILTI))

 

U.S. shareholders of the corporations other than CFC

If you are a U.S. resident with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer.

Ordinary Dividends

Ordinary dividends are the most common type of distribution from a corporation or a mutual fund and are taxable. They are paid out of earnings and profits and are ordinary income to you. This means they aren't capital gains.

Qualified Dividends

Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. The maximum rate of tax on qualified dividends is the following.

  • 0% on any amount that otherwise would be taxed at a 10% or 15% rate.

  • 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 37%.

  • 20% on any amount that otherwise would be taxed at a 37% rate.

  • To qualify for the maximum rate, all of the following requirements must be met.

  • The dividends must have been paid by a qualified foreign corporation.

  • The dividends aren't of the type listed under Dividends that aren't qualified dividends, later.

  • You meet the holding period.

Holding period

You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock isn't entitled to receive the next dividend payment. Instead, the seller will get the dividend.

Qualified foreign corporation

A foreign corporation is a qualified foreign corporation if it meets any of the following conditions.

1. The corporation is incorporated in a U.S. possession.

2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Department of the Treasury determines is satisfactory for this purpose and that includes an exchange of information program. For a list of those treaties, see List 1.

3. The corporation doesn't meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States.

Dividends that aren't qualified dividends

The following dividends aren't qualified dividends. They aren't qualified dividends even if they are shown in box 1b of Form 1099-DIV.

  • Capital gain distributions.

  • Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, savings and loan associations, federal savings and loan associations, and similar financial institutions. (Report these amounts as interest income.)

  • Dividends from a corporation that is a tax-exempt organization

  • Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.

  • Payments in lieu of dividends, but only if you know or have reason to know the payments aren't qualified dividends.

  • Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments aren't qualified dividends

 

(Refer to Form 1040, U.S. Individual Income Tax Return)