Code Section 304

Code Section	Effective Date	Name of Act	Name of Provision	10yr Revenue Estimate ($millions)
304(b)	8/10/2010	The Air Traffic Control Act	Special Rule with Respect to Certain Redemptions by Foreign Subsidiaries	250

Special Rule with Respect to Certain Redemptions by Foreign Subsidiaries

Explanation of Provision

The provision generally imposes an additional limitation on the E&P of a foreign acquiring corporation that is taken into account in determining the amount (and source) of the distribution that is treated as a dividend.

Under the provision, if more than 50 percent of the dividends arising from acquisition would (without taking into account the provision) not be (1) subject to U.S. tax in the year in which the dividend arises, or (2) includible in the E&P of a CFC,¹²⁶⁰ then the E&P of the foreign acquiring corporation is not taken into account for this purpose.¹²⁶¹

If it is determined that the special rule applies, none of the foreign acquiring corporation’s E&P is taken into account. In such case, the only E&P that is taken into account to determine the amount constituting a dividend is the target corporation’s E&P. The provision prevents the foreign acquiring corporation’s E&P from permanently escaping U.S. taxation by being deemed to be distributed directly to a foreign person (i.e., the transferor) without an intermediate distribution to a domestic corporation in the chain of ownership between the acquiring corporation and the transferor corporation. Generally, if the transferor is a foreign corporation (and not a CFC) and the acquiring corporation is a CFC, it is not relevant whether the target corporation is a domestic or a foreign corporation. However, if the target is a U.S. corporation, the 30-percent gross basis withholding tax applies to the amount constituting a dividend from the target, unless reduced or eliminated by treaty.¹²⁶²

It is anticipated that regulations will provide rules to prevent the avoidance of the provision, including through the use of partnerships, options, or other arrangements to cause a foreign corporation to be treated as a CFC.

1260- For purposes of this rule, ‘‘CFC’’ is defined by reference to section 957, but without regard to section 953(c).
-Return to Explanation of Provision

1261- It is not intended that the provision apply if an amount is not subject to tax under this chapter for the taxable year in which the dividend arises solely as a result of the application of section 959.
-Return to Explanation of Provision

1262- Sec. 1442; Rev. Rul. 92–85; 1992–2 C.B. 69.
-Return to Explanation of Provision

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