In this video, I discuss expatriate market to market and corporate inversion as covered on the tax compliance and planning TCP CPA exam.
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In a territorial tax system, the main way to avoid taxing the same income twice is through either a participation exemption or a dividends-received deduction (DRD). Here's what each means:

Participation Exemption: This rule lets taxpayers not pay taxes on foreign income. Essentially, if a company in one country earns profits through its investments in another country, the home country won't tax those profits.

Dividends-Received Deduction (DRD): This provision allows taxpayers to reduce their taxable income by the amount of dividend income they've received from abroad. In other words, when a company receives dividend payments from its foreign investments, it can deduct those amounts from its income, reducing the total amount of income subject to tax.

Unlike the worldwide tax system, where a country taxes its residents on their global income regardless of where it's earned, the territorial system taxes income only where it's earned. This means if a taxpayer earns income in a country with lower taxes, they won't face additional taxes from their home country to "top up" to the home country's tax rate. Therefore, taxpayers operating in a low-tax jurisdiction are taxed at the same rate as local businesses in that jurisdiction, without facing extra taxes from their home country for bringing that income back home.

In the United States, a corporation can avoid paying U.S. taxes on dividends it receives from foreign companies if it owns at least 10% of the foreign company. This is done by using a 100% dividends-received deduction (DRD), which means the U.S. corporation can deduct the full amount of the foreign dividend from its taxable income, effectively exempting that income from U.S. taxes.

When dividends are sent back to the U.S. from overseas, no additional U.S. taxes are levied on this money. Therefore, the U.S. doesn't tax the repatriated foreign earnings under this rule.

However, this tax benefit is not available to 10% shareholders that are not U.S. corporations. In other words, individual investors or entities that don't qualify as U.S. corporations cannot use the DRD to exempt their foreign dividend income from U.S. taxation, even if they own 10% or more of the foreign company.

Under the U.S. tax rules for the 100% dividends-received deduction (DRD) on foreign dividends, there are specific conditions and limitations to keep in mind:

No Foreign Tax Credit or Deduction: If a U.S. corporation uses the 100% DRD to exempt foreign dividends from U.S. taxation, it cannot also claim a foreign tax credit or deduction for taxes paid to foreign governments on those dividends. Essentially, you can't double-dip by getting a deduction for the full amount of the dividend and also claiming a credit or deduction for foreign taxes paid on that same income.

Holding Period Requirement: To qualify for the 100% DRD, the U.S. corporation must have owned the stock of the foreign corporation for more than 365 days within a specific 731-day window. This window starts 365 days before the dividend's ex-dividend date (the day on which you must own the stock to receive the declared dividend). This rule ensures that the DRD is used by corporations with a more substantial and longer-term investment in the foreign corporation, rather than by those making short-term trades.

Exclusions from the DRD: Certain types of foreign income are not eligible for the 100% DRD, including:

Subpart F Income: This is generally passive income or income from certain anti-avoidance transactions, which the U.S. taxes as if it were distributed to the U.S. shareholder, regardless of whether it's actually distributed.
Global Intangible Low-Taxed Income (GILTI): A category of foreign income that is subject to U.S. taxation on an annual basis to prevent profit shifting to low-tax jurisdictions.
Income Invested in U.S. Property: Earnings that are considered to be reinvested in U.S. assets by the foreign corporation.
Income Subject to the Transition Tax: A one-time tax imposed on previously untaxed foreign earnings of U.S. companies' foreign subsidiaries as part of the move to a territorial tax system under the Tax Cuts and Jobs Act of 2017.
These special rules ensure that the 100% DRD is used in a manner consistent with its policy objectives, limiting its application to certain types of long-term investments and preventing its use for tax avoidance purposes.








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