Treasury And IRS Announce Repatriation Guidance Under Section 965

by Mike Godfrey, Tax-News.com, Washington

23 August 2005

The Treasury Department and IRS on Friday released the third in a series of notices providing detailed guidance for US companies that elect to repatriate earnings from foreign subsidiaries subject to the temporary reduced tax rate available under the American Jobs Creation Act (AJCA).

The notice published last week provides guidance to companies on various issues arising under section 965, including issues relating to the identification of dividends, foreign tax credit and minimum tax credit, expense allocation and apportionment, and currency translation. Contemporaneous with the issuance of this notice, the IRS released the final Form 8895 (One-Time Dividends Received Deduction for Certain Cash Dividends from Controlled Foreign Corporations) and its instructions.

Internal Revenue Code section 965, enacted as part of the AJCA in October of 2004, is a temporary provision that allows a US company to repatriate earnings from its foreign subsidiaries at a reduced effective tax rate provided that specified conditions and restrictions are satisfied. Section 965 provides that a US company may elect, for one taxable year, for an 85% tax deduction on dividends received from its foreign subsidiaries, giving an effective 5.25% tax rate on qualifying dividends.

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