The Treasury Department and IRS last week announced the first in a series of notices that will provide guidance for U.S. companies planning to repatriate earnings from overseas subsidiaries subject to the temporary reduced tax rate available under the American Jobs Creation Act (AJCA).
Internal Revenue Code Section 965, enacted as part of the AJCA in October 2004, allows U.S. companies to repatriate earnings from their foreign subsidiaries at a reduced tax rate. Section 965 provides that U.S. companies may elect, for one taxable year, an 85% dividends received deduction for eligible dividends from their foreign subsidiaries.
Section 965 contains several limitations on the repatriated dividends that are eligible for the reduced tax rate. One key requirement is that the repatriated funds must be invested by the company in the United States pursuant to a domestic reinvestment plan approved by company management before the funds are repatriated.
Last week's notice provides detailed guidance regarding the parameters for a domestic reinvestment plan and the kinds of investments in the United States for which repatriated funds may be used under this provision. The notice also provides guidance on the requirement that the repatriation be in the form of a cash dividend. In addition, the notice provides guidance on electing application of the provision and on required information reporting regarding repatriated dividends and associated U.S. investments, and provides a safe harbor mechanism for taxpayers to use in establishing that the domestic reinvestment plan requirement is satisfied.
"Given the importance of the new repatriation provision to U.S. companies, coupled with the immediate effective date of the provision and its temporary nature, issuance of prompt guidance was a major priority," said Eric Solomon, Treasury's Acting Deputy Assistant Secretary for Tax Policy. "In today's notice we focused on addressing the most urgent questions, particularly the required U.S. investment of the repatriated earnings."
"This guidance will allow taxpayers to be able to comply with the new provision regarding the repatriation of earnings while at the same time giving the IRS examination function the necessary roadmap to ensure compliance with the new rules," said IRS Chief Counsel Don Korb.