(a) Deduction
(1) In general
In the case of a corporation which is a United States shareholder and for which the election under this section is in effect for the taxable year, there shall be allowed as a deduction an amount equal to 85 percent of the cash dividends which are received during such taxable year by such shareholder from controlled foreign corporations.
(2) Dividends paid indirectly from controlled foreign corporations If, within the taxable year for which the election under this section is in effect, a United States shareholder receives a cash distribution from a controlled foreign corporation which is excluded from gross income under section
959 (a), such distribution shall be treated for purposes of this section as a cash dividend to the extent of any amount included in income by such United States shareholder under section
951 (a)(1)(A) as a result of any cash dividend during such taxable year to
(A) such controlled foreign corporation from another controlled foreign corporation that is in a chain of ownership described in section
958 (a), or
(B) any other controlled foreign corporation in such chain of ownership from another controlled foreign corporation in such chain of ownership, but only to the extent of cash distributions described in section
959 (b) which are made during such taxable year to the controlled foreign corporation from which such United States shareholder received such distribution.
(b) Limitations
(1) In general The amount of dividends taken into account under subsection (a) shall not exceed the greater of
(A) $500,000,000,
(B) the amount shown on the applicable financial statement as earnings permanently reinvested outside the United States, or
(C) in the case of an applicable financial statement which fails to show a specific amount of earnings permanently reinvested outside the United States and which shows a specific amount of tax liability attributable to such earnings, the amount equal to the amount of such liability divided by 0.35.
The amounts described in subparagraphs (B) and (C) shall be treated as being zero if there is no such statement or such statement fails to show a specific amount of such earnings or liability, as the case may be.
(2) Dividends must be extraordinary The amount of dividends taken into account under subsection (a) shall not exceed the excess (if any) of
(A) the cash dividends received during the taxable year by such shareholder from controlled foreign corporations, over
(B) the annual average for the base period years of
(i) the dividends received during each base period year by such shareholder from controlled foreign corporations,
(ii) the amounts includible in such shareholders gross income for each base period year under section
951 (a)(1)(B) with respect to controlled foreign corporations, and
(iii) the amounts that would have been included for each base period year but for section
959 (a) with respect to controlled foreign corporations.
The amount taken into account under clause (iii) for any base period year shall not include any amount which is not includible in gross income by reason of an amount described in clause (ii) with respect to a prior taxable year. Amounts described in subparagraph (B) for any base period year shall be such amounts as shown on the most recent return filed for such year; except that amended returns filed after June 30, 2003, shall not be taken into account.
(3) Reduction of benefit if increase in related party indebtedness The amount of dividends which would (but for this paragraph) be taken into account under subsection (a) shall be reduced by the excess (if any) of
(A) the amount of indebtedness of the controlled foreign corporation to any related person (as defined in section 954(d)(3)) as of the close of the taxable year for which the election under this section is in effect, over
(B) the amount of indebtedness of the controlled foreign corporation to any related person (as so defined) as of the close of October 3, 2004.
All controlled foreign corporations with respect to which the taxpayer is a United States shareholder shall be treated as 1 controlled foreign corporation for purposes of this paragraph. The Secretary may prescribe such regulations as may be necessary or appropriate to prevent the avoidance of the purposes of this paragraph, including regulations which provide that cash dividends shall not be taken into account under subsection (a) to the extent such dividends are attributable to the direct or indirect transfer (including through the use of intervening entities or capital contributions) of cash or other property from a related person (as so defined) to a controlled foreign corporation.
(4) Requirement to invest in United States Subsection (a) shall not apply to any dividend received by a United States shareholder unless the amount of the dividend is invested in the United States pursuant to a domestic reinvestment plan which
(A) is approved by the taxpayers president, chief executive officer, or comparable official before the payment of such dividend and subsequently approved by the taxpayers board of directors, management committee, executive committee, or similar body, and
(B) provides for the reinvestment of such dividend in the United States (other than as payment for executive compensation), including as a source for the funding of worker hiring and training, infrastructure, research and development, capital investments, or the financial stabilization of the corporation for the purposes of job retention or creation.
(c) Definitions and special rules For purposes of this section
(1) Applicable financial statement The term applicable financial statement means
(A) with respect to a United States shareholder which is required to file a financial statement with the Securities and Exchange Commission (or which is included in such a statement so filed by another person), the most recent audited annual financial statement (including the notes which form an integral part of such statement) of such shareholder (or which includes such shareholder)
(i) which was so filed on or before June 30, 2003, and
(ii) which was certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
(B) with respect to any other United States shareholder, the most recent audited financial statement (including the notes which form an integral part of such statement) of such shareholder (or which includes such shareholder)
(i) which was certified on or before June 30, 2003, as being prepared in accordance with generally accepted accounting principles, and
(ii) which is used for the purposes of a statement or report
(I) to creditors,
(II) to shareholders, or
(III) for any other substantial nontax purpose.
(2) Base period years
(A) In general The base period years are the 3 taxable years
(i) which are among the 5 most recent taxable years ending on or before June 30, 2003, and
(ii) which are determined by disregarding
(I) 1 taxable year for which the sum of the amounts described in clauses (i), (ii), and (iii) of subsection (b)(2)(B) is the largest, and
(II) 1 taxable year for which such sum is the smallest.
(B) Shorter period
If the taxpayer has fewer than 5 taxable years ending on or before June 30, 2003, then in lieu of applying subparagraph (A), the base period years shall include all the taxable years of the taxpayer ending on or before June 30, 2003.
(C) Mergers, acquisitions, etc.
(i) In general Rules similar to the rules of subparagraphs (A) and (B) of section
41 (f)(3) shall apply for purposes of this paragraph.
(ii) Spin-offs, etc. If there is a distribution to which section
355 (or so much of section
356 as relates to section
355) applies during the 5-year period referred to in subparagraph (A)(i) and the controlled corporation (within the meaning of section
355) is a United States shareholder
(I) the controlled corporation shall be treated as being in existence during the period that the distributing corporation (within the meaning of section
355) is in existence, and
(II) for purposes of applying subsection (b)(2) to the controlled corporation and the distributing corporation, amounts described in subsection (b)(2)(B) which are received or includible by the distributing corporation or controlled corporation (as the case may be) before the distribution referred to in subclause (I) from a controlled foreign corporation shall be allocated between such corporations in proportion to their respective interests as United States shareholders of such controlled foreign corporation immediately after such distribution.
Subclause (II) shall not apply if neither the controlled corporation nor the distributing corporation is a United States shareholder of such controlled foreign corporation immediately after such distribution.
(3) Dividend The term dividend shall not include amounts includible in gross income as a dividend under section
78,
367, or
1248. In the case of a liquidation under section
332 to which section
367 (b) applies, the preceding sentence shall not apply to the extent the United States shareholder actually receives cash as part of the liquidation.
(4) Coordination with dividends received deduction No deduction shall be allowed under section
243 or
245 for any dividend for which a deduction is allowed under this section.
(5) Controlled groups
(A) In general All United States shareholders which are members of an affiliated group filing a consolidated return under section
1501 shall be treated as one United States shareholder.
(B) Application of $500,000,000 limit All corporations which are treated as a single employer under section
52 (a) shall be limited to one $500,000,000 amount in subsection (b)(1)(A), and such amount shall be divided among such corporations under regulations prescribed by the Secretary.
(C) Permanently reinvested earnings
If a financial statement is an applicable financial statement for more than 1 United States shareholder, the amount applicable under subparagraph (B) or (C) of subsection (b)(1) shall be divided among such shareholders under regulations prescribed by the Secretary.
(d) Denial of foreign tax credit; denial of certain expenses
(1) 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 deductible portion of
(A) any dividend, or
(B) any amount described in subsection (a)(2) which is included in income under section
951 (a)(1)(A).
No deduction shall be allowed under this chapter for any tax for which credit is not allowable by reason of the preceding sentence.
(2) Expenses
No deduction shall be allowed for expenses directly allocable to the deductible portion described in paragraph (1).
(3) Deductible portion
For purposes of paragraph (1), unless the taxpayer otherwise specifies, the deductible portion of any dividend or other amount is the amount which bears the same ratio to the amount of such dividend or other amount as the amount allowed as a deduction under subsection (a) for the taxable year bears to the amount described in subsection (b)(2)(A) for such year.
(4) Coordination with section 78 Section
78 shall not apply to any tax which is not allowable as a credit under section
901 by reason of this subsection.
(e) Increase in tax on included amounts not reduced by credits, etc.
(1) In general Any tax under this chapter by reason of nondeductible CFC dividends shall not be treated as tax imposed by this chapter for purposes of determining
(A) the amount of any credit allowable under this chapter, or
(B) the amount of the tax imposed by section
55.
Subparagraph (A) shall not apply to the credit under section 53 or to the credit under section 27 (a) with respect to taxes which are imposed by foreign countries and possessions of the United States and are attributable to such dividends.
(2) Limitation on reduction in taxable income, etc.
(A) In general
The taxable income of any United States shareholder for any taxable year shall in no event be less than the amount of nondeductible CFC dividends received during such year.
(B) Coordination with section 172 The nondeductible CFC dividends for any taxable year shall not be taken into account
(i) in determining under section
172 the amount of any net operating loss for such taxable year, and
(ii) in determining taxable income for such taxable year for purposes of the 2nd sentence of section
172 (b)(2).
(3) Nondeductible CFC dividends
For purposes of this subsection, the term nondeductible CFC dividends means the excess of the amount of dividends taken into account under subsection (a) over the deduction allowed under subsection (a) for such dividends.
(f) Election The taxpayer may elect to apply this section to
(1) the taxpayers last taxable year which begins before the date of the enactment of this section, or
(2) the taxpayers first taxable year which begins during the 1-year period beginning on such date.
Such election may be made for a taxable year only if made on or before the due date (including extensions) for filing the return of tax for such taxable year.
