Participation Exemption (100% DRD for Foreign Dividends)

§ 245A. Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations(a) In generalIn the case of any dividend received from a specified 10-percent owned foreign corporation by a domestic corporation which is a United States shareholder with respect to such foreign corporation, there shall be allowed as a deduction an amount equal to the foreign-source portion of such dividend. (b) Specified 10-percent owned foreign corporationFor purposes of this section—(1) In generalThe term “specified 10-percent owned foreign corporation” means any foreign corporation with respect to which any domestic corporation is a United States shareholder with respect to such corporation. (2) Exclusion of passive foreign investment companiesSuch term shall not include any corporation which is a passive foreign investment company (as defined in section 1297) with respect to the shareholder and which is not a controlled foreign corporation. (c) Foreign-source portionFor purposes of this section—(1) In generalThe foreign-source portion of any dividend from a specified 10-percent owned foreign corporation is an amount which bears the same ratio to such dividend as—(A) the undistributed foreign earnings of the specified 10-percent owned foreign corporation, bears to (B) the total undistributed earnings of such foreign corporation. (2) Undistributed earningsThe term “undistributed earnings” means the amount of the earnings and profits of the specified 10-percent owned foreign corporation (computed in accordance with sections 964(a) and 986)—(A) as of the close of the taxable year of the specified 10-percent owned foreign corporation in which the dividend is distributed, and (B) without diminution by reason of dividends distributed during such taxable year. (3) Undistributed foreign earningsThe term “undistributed foreign earnings” means the portion of the undistributed earnings which is attributable to neither—(A) income described in subparagraph (A) of section 245(a)(5), nor (B) dividends described in subparagraph (B) of such section (determined without regard to section 245(a)(12)). (d) Disallowance of foreign tax credit, etc.(1) In generalNo credit shall be allowed under section 901 for any taxes paid or accrued (or treated as paid or accrued) with respect to any dividend for which a deduction is allowed under this section. (2) Denial of deductionNo deduction shall be allowed under this chapter for any tax for which credit is not allowable under section 901 by reason of paragraph (1) (determined by treating the taxpayer as having elected the benefits of subpart A of part III of subchapter N). (e) Special rules for hybrid dividends(1) In generalSubsection (a) shall not apply to any dividend received by a United States shareholder from a controlled foreign corporation if the dividend is a hybrid dividend.