Indirect Foreign Tax Credits

Under §902, a domestic corporation may be deemed to have paid, for purposes of the §901 foreign tax credit, foreign income taxes paid by a foreign corporation from which the domestic corporate shareholder receives a dividend. It is also relevant the analysis of §960, under which a domestic corporation that is taxed on earnings and profits of a controlled foreign corporation under §951 may be deemed to have paid foreign income taxes paid by the foreign corporation.

There are special situations in which an indirect credit may arise: when a U.S. shareholder sells stock in a controlled foreign corporation and the gain is re-characterized as a dividend under §1248; when a U.S. shareholder is deemed to receive a dividend in a reorganization or other transaction covered by §367(b); when a U.S. shareholder is taxed on income of a passive foreign investment company; and when a U.S. shareholder receives certain distributions from a DISC or FSC.

There is also the interrelationship of indirect credit rules and the §904 limitation on the foreign tax credit. In addition, it is relevant, in this topic, to examine the rules of §78, and the effect on indirect foreign tax credits of § 482 adjustments, refunds and redeterminations of foreign tax.