#### § 1.243-3 Certain dividends from foreign corporations.

(a) *In general.*

(1) In determining the deduction provided in section 243(a), section 243(d) provides that a dividend received from a foreign corporation after December 31, 1959, shall be treated as a dividend from a domestic corporation which is subject to taxation under chapter 1 of the Code, but only to the extent that such dividend is out of earnings and profits accumulated by a domestic corporation during a period with respect to which such domestic corporation was subject to taxation under Chapter 1 of the Code (or corresponding provisions of prior law). Thus, for example, if a domestic corporation accumulates earnings and profits during a period or periods with respect to which it is subject to taxation under Chapter 1 of the Code (or corresponding provisions of prior law) and subsequently such domestic corporation reincorporates in a foreign country, any dividends paid out of such earnings and profits after such reincorporation are eligible for the deduction provided in section 243(a) (1) and (2).

(2) Section 243(d) and this section do not apply to dividends paid out of earnings and profits accumulated

(i) by a corporation organized under the China Trade Act, 1922,

(ii) by a domestic corporation during any period with respect to which such corporation was exempt from taxation under section 501 (relating to certain charitable, etc. organizations) or 521 (relating to farmers' cooperative associations), or

(iii) by a domestic corporation during any period to which section 931 (relating to income from sources within possessions of the United States), as in effect for taxable years beginning before January 1, 1976, applied.

(b) *Establishing separate earnings and profits accounts.* A foreign corporation shall, for purposes of section 243(d), maintain a separate account for earnings and profits to which it succeeds which were accumulated by a domestic corporation, and such foreign corporation shall treat such earnings and profits as having been accumulated during the accounting periods in which earned by such domestic corporation. Such foreign corporation shall also maintain such a separate account for the earnings and profits, or deficit in earnings and profits, accumulated by it or accumulated by any other corporations to the earnings and profits of which it succeeds.

(c) *Effect of dividends on earnings and profits accounts.* Dividends paid out of the accumulated earnings and profits (see section 316(a)(1) of such foreign corporation shall be treated as having been paid out of the most recently accumulated earnings and profits of such corporation. A deficit in an earnings and profits account for any accounting period shall reduce the most recently accumulated earnings and profits for a prior accounting period in such account. If there are no accumulated earnings and profits in an earnings and profits account because of a deficit incurred in a prior accounting period, such deficit must be restored before earnings and profits can be accumulated in a subsequent accounting period. If a dividend is paid out of earnings and profits of a foreign corporation which maintains two or more accounts (established under the provisions of paragraph (b) of this section) with respect to two or more accounting periods ending on the same day, then the portion of such dividend considered as paid out of each account shall be the same proportion of the total dividend as the amount of earnings and profits in that account bears to the sum of the earnings and profits in all such accounts.

(d) *Illustration.* The application of the principles of this section in the determination of the amount of the dividends received deduction may be illustrated by the following example:

# Example.

On December 31, 1960, corporation X, a calendar-year corporation organized in the United States on January 1, 1958, consolidated with corporation Y, a foreign corporation organized on January 1, 1958, which used an annual accounting period based on the calendar year, to form corporation Z, a foreign corporation not engaged in trade or business within the United States. Corporation Z is a wholly-owned subsidiary of corporation M, a domestic corporation. On January 1, 1961, corporation Z's accumulated earnings and profits of $31,000 are, under the provisions of paragraph (b) of this section, maintained in separate earnings and profits accounts containing the following amounts:

| Earnings and profits accumulated for— | Domestic corp. X | Foreign corp. Y |
| --- | --- | --- |
| 1958 | ($1,000) | $11,000 |
| 1959 | 10,000 | 9,000 |
| 1960 | 5,000 | (3,000) |

Corporation Z had earnings and profits of $10,000 in each of the years 1961, 1962, and 1963 and makes distributions with respect to its stock to corporation M for such years in the following amounts:

| 1961 | $14,000 |
| --- | --- |
| 1962 | 23,000 |
| 1963 | 16,000 |

(1) For 1961, a deduction of $3,400 is allowable to M with respect to the $14,000 distribution from Z, computed as follows:

| (i) Dividend from current year earnings and profits (1961) | $10,000 |
| --- | --- |
| (ii) Dividend from earnings and profits of corporation X accumulated for 1960 | 4,000 |
| (iii) Deduction: 85 percent of $4,000 (the amount distributed from the accumulated earnings and profits of corporation X) | 3,400 |

(2) For 1962, a deduction of $6,970 is allowable to corporation M with respect to the $23,000 distribution from corporation Z, computed as follows:

| (i) Dividend from current year earnings and profits (1962) | $10,000 |
| --- | --- |
| (ii) Dividend from earnings and profits of corporation X accumulated for: | | |
| 1960 | $1,000 | |
| 1959: $9,000 (i.e., $10,000 − $1,000) divided by $15,000 (i.e., $9,000 + $9,000−$3,000) multiplied by $12,000 (i.e., $23,000−$11,000) | 7,200 |
| Total | 8,200 | |
| (iii) Dividend from earnings and profits of corporation Y accumulated for: | | |
| 1959: $6,000/$15,000 × $12,000 | 4,800 |
| (iv) Deduction: 85 percent of $8,200 (the amount distributed from the accumulated earnings and profits of corporation X) | | 6,970 |

(3) For 1963, a deduction of $1,530 is allowable to M with respect to the $16,000 distribution from Z, computed as follows:

| (i) Dividend from current year earnings and profits (1963) | $10,000 |
| --- | --- |
| (ii) Dividend from earnings and profits of corporation X accumulated for 1959: | |
| Earnings and profits remaining after 1962 distribution (i.e., $9,000−$7,200) | 1,800 |
| (iii) Dividend from earnings and profits of corporation Y accumulated for 1959: | |
| Earnings and profits remaining after 1962 distribution (i.e., $6,000−$4,800) | 1,200 |
| 1958 | 8,000 |
| (iv) Deduction: 85 percent of $1,800 (the amount distributed from the accumulated earnings and profits of corporation X) | 1,530 |

[T.D. 6830, 30 FR 8045, June 23, 1965, as amended by T.D. 9194, 70 FR 18928, Apr. 11, 2005]