US Releases Further Guidance On AJCA Profits Repatriation

by Mike Godfrey, Tax-News.com, Washington

12 May 2005

The Treasury Department and IRS have announced the second in a series of notices that provide 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 released Tuesday provides guidance to companies on what constitutes a qualifying dividend, the impact of mergers and acquisitions and issues related to the section 78 gross-up.

Internal Revenue Code section 965, enacted as part of the AJCA in October 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, an 85 percent dividends received deduction for eligible dividends from its foreign subsidiaries, giving it an effective 5.25 percent tax rate on qualifying dividends.

In January 2005, Treasury and IRS issued a notice (Notice 2005-10) that provided guidance to companies on the domestic reinvestment plan requirement under the new provision. The notice specified permitted investments in the United States for which the repatriated funds may be used under this provision.

The new notice (Notice 2005-38) provides additional guidance on the amount of dividends that qualify for the dividends received deduction. Further, Treasury and the IRS announced their intention to issue a third notice that will address the impact of section 965 on a corporation's computation of its tax liability.

A copy of the regulations can be accessed at:

http://www.ustreas.gov/press/releases/reports/n200538.pdf

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