Section 245A Regulations Roadmap

The 2017 tax act (Pub. L. No. 115-97) significantly altered the international tax regime in the United States, including by introducing a partial territorial system of taxation for certain dividends received from certain foreign corporations by allowing a dividends received deduction (DRD) for such dividends under §245A.

The new §245A provides a 100% DRD on the foreign-source portion of any dividends received after December 31, 2017, by a corporate U.S. shareholder from any foreign corporation with a domestic corporation as a U.S. shareholder. The §245A DRD is generally intended to be available only with respect to distributions of residual untaxed foreign-source earnings and profits (E&P) remaining after application of the §951 subpart F regime and the §951A global intangible low-taxed income (GILTI) regime.

Section 245A(e) includes rules that disallow the §245A DRD with respect to hybrid dividends. In April 2020, Treasury and the IRS issued final regulations (T.D. 9896) and a second set of proposed regulations (REG-106013-19) that address the implementation of §245A with regard to hybrid dividends.

Treasury and the IRS plan to release general rules relating to dividends eligible for the §245A DRD (including the treatment of partnerships under §245A) in future guidance. Reg. §1.245A-1 Reg. §1.245A-4 are reserved for this purpose.

This roadmap highlights key takeaways from the temporary and proposed regulations released thus far.

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