Andrew Mitchel LLC

International Tax Blog - New and Interesting International Tax Issues

Repatriate Now? (Before the Bush Tax Cuts Expire)


U.S. individuals who own or control certain foreign corporations may want to consider having their foreign corporations pay as large of a dividend as possible before the end of 2012.

Under current U.S. tax law, dividends received (directly, or indirectly through partnerships or “S” corporations) by individuals from qualified foreign corporations are currently taxed in the U.S. at a maximum Federal tax rate of 15%. Qualified foreign corporations are, very generally, corporations that qualify for benefits under a comprehensive income tax treaty with the U.S.

If Congress takes no action, dividends paid by foreign corporations to U.S. individuals after 2012, will be subject to Federal ordinary income tax rates of as much as 43.4% (reversion to the Clinton era maximum ordinary income tax rate of 39.6% plus the Unearned Income Medicare Contribution tax of 3.8% [enacted in 2010 and goes into effect in 2013]).

Although capital gains have been subject to preferential tax rates for decades, dividend income did not benefit from reduced tax rates until 2003. If Congress does nothing, the maximum Federal capital gains tax rate increases from 15% to 20%. However, the maximum Federal tax rate on qualified dividend income increases from 15% to 43.4%.

One consideration in deciding whether to repatriate funds now is the amount of foreign withholding taxes imposed on dividends paid by foreign corporations. However, foreign dividend withholding taxes may be allowed as foreign tax credits against U.S. income taxes.

U.S. state income taxes may also be imposed on dividend income from foreign corporations.

Some tax advisors hold out hope that Congress may enact a “one-time” tax holiday to repatriate funds from foreign corporations, similar to the 2004 special tax holiday. However, the 2004 special tax holiday only applied to U.S. “C” corporations that owned foreign subsidiaries. Even if this “one-time” provision were to come around again, it may not apply to dividends received by individuals.

For taxpayers considering repatriating foreign corporation earnings, it is important to perform the proper U.S. tax analysis (prior to the payment of the dividend) to confirm that the maximum Federal rate of 15% will apply. You should contact a competent U.S. tax advisor in this regard.

There may never be another opportunity for individuals to pull cash out of foreign corporations at such a low U.S. tax cost.

Tags: 1(h)(11) Qualified Dividend Income