Department of the Treasury Instructions for Form 8895 Internal Revenue Service

(August 2005)

One-Time Dividends Received Deduction for Certain Cash Dividends from

Controlled Foreign Corporations

Section references are to the Internal Revenue Code unless otherwise noted.

reason of section 814(e)(2) (dealing with purposes, use the definition of “related General Instructions contiguous country branches). See Notice person” in section 954(d)(3). For more

2005-38, Section 9.02. information, see Notice 2005-38, Sections Corporations making a section Note also. 2.04, 7, and 10, and Notice 2005-64, If you are a corporation filing 965 election (defined below) must Section 10. CAUTION

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use these instructions to complete Form 1120S, you are not eligible to claim

the section 965 DRD. See section all portions of their tax returns affected by Line 11. Qualifying Dividends 1373(a). the election. These pages contain many Subtract line 10 from line 7. If zero or

instructions that supplement information less, the corporation is not entitled to provided in other tax forms and Part I–Qualifying claim the section 965 DRD and should

instructions issued prior to this instruction Information not file Form 8895.

booklet. Line 11 is the portion of the gross For additional information, see Notice Items A through C “cash dividends” reported on line 1 that 2005-10, 2005-6 I.R.B. 474; Notice See Notice 2005-10, Section 4, for qualify for the DRD (after taking into 2005-38, 2005-22 I.R.B. 1100; Notice detailed information about domestic account all of the limits contained in

2005-64, 2005-36 I.R.B. (page number reinvestment plans (DRPs). sections 965(b)(1) through (4)). If line 11 not available at time of printing), and any is more than zero, enter it on Form 1120, subsequent guidance issued by the IRS Item D and E Schedule C, line 12, column (a) and Treasury with respect to section 965. If the corporation is a member of a (dividends from CFCs subject to the 85% controlled group, see Notice 2005-38, deduction). Purpose of Form Sections 2.03 and 4, and Notice 2005-64,

Section 10.03. Also see Notice 2005-64, Section 965(c)(4) states that no A corporate U.S. shareholder of a Section 10.04, for information relating to deduction is allowed under section controlled foreign corporation (CFC) uses restatements of financial statements. CAUTION 243 or 245 for any dividend for

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Form 8895 to elect the 85% dividends which a deduction is allowed under received deduction (DRD) provided under Part II–Dividends section 965. As such, do not enter on section 965 (section 965 election) and to Form 1120, Schedule C, lines 3, 6, 7, 8, compute the DRD. The corporation may

make the election for: Received Deduction or 11, any amount from Form 8895, line

11 (which is carried over to Form 1120, • Its last tax year that begins before Line 1. Cash Dividends October 22, 2004, or Schedule C, line 12). Enter the gross “cash dividends” the • Its first tax year that begins during the corporation received from all CFCs during Line 12 one-year period beginning on October 22, the tax year. See Notice 2005-10, Section Enter all section 965(a)(2) amounts 2004. 3, Notice 2005-38, Section 9.06, and included on line 11. See the instructions

The corporation makes the section 965 Notice 2005-64, Section 3.01, regarding for Part V beginning on page 3. These election by attaching Form 8895 to its “cash dividends.” amounts are included on Form 1120, timely filed tax return (including Schedule C, line 12, column (a). Do not extensions) for such tax year. However, a Line 3. Section 965(b)(1) Limit include on Form 1120, Schedule C, line

corporation that filed its return before If the corporation is a member of a 14, column (a), any section 965(a)(2) Form 8895 was made available in final controlled group, see Notice 2005-38, amount included on Form 1120, Schedule

form need not file the form with an Sections 2.03 and 4, and Notice 2005-64, C, line 12, column (a). amended return, but should retain the Section 10.03.

information requested on the form to be Line 13. Deductible Portion of

made available to the IRS upon request. Line 5. Section 965(b)(2) Limit Qualifying Dividends

See Notice 2005-10, Section 2, Notice Subtract line 4 from line 1. If zero or less, Multiply line 11 by 85%. This is the the corporation is not entitled to claim the 2005-38, Section 5, and Notice 2005-64, deductible portion of line 11 qualifying

Section 3, for more information. section 965 DRD and should not file Form dividends. 8895.

Note. The corporation cannot take a Line 6. Section 965(b)(4) Limit foreign tax credit or deduction for foreign

Specific Instructions Enter amounts to be reinvested in the taxes paid, accrued, or deemed paid on

United States under a DRP. See Notice line 13 dividends. See the instructions for

2005-10, Sections 5, 6, and 8, for detailed Part IV on page 3 for additional The form and instructions contain information. information. Also see Notice 2005-38, references to specific lines on Sections 2.05, 8, 9.03, 9.05, 10, and 11, CAUTION Form 1120. If you are filing Form Line 14. Expenses Disallowed !

and Notice 2005-64, Sections 10 and 11. 1120-L, 1120-PC, or 990-C, use the Under Section 965(d)(2) With comparable line of your tax return for the Lines 8 Through 10. Section Respect to Line 13 Amount line referenced for Form 1120. 965(b)(3) Limit Enter the amount of expenses disallowed

Note. If you are a domestic life For purposes of determining related party under section 965(d)(2) with respect to

insurance company filing Form 1120-L, indebtedness of the CFC on lines 8 and the amount entered on line 13. See

you are not eligible for the section 965 9, all CFCs with respect to which the Notice 2005-38, Section 9.01, and Notice

DRD with respect to any amount added to corporation is a U.S. shareholder are 2005-64, Section 5, for additional

life insurance company taxable income by treated as a single CFC. Also, for these information.

Cat. No. 39824S
Do not include any of these line 14 9.02, 9.03, 9.05, and 9.06, Examples 2, 5, Line 20

expenses on Form 1120 (i.e., page 1, and 6, for additional information. Subtract line 19 from line 18. This is the lines 12 through 27; Schedule A; or any • Enter on Form 4626, line 13, the corporation’s tax on income other than other expense or deduction line of Form amount from Form 8895, line 24, minus nondeductible CFC dividends. This tax 1120). the possessions tax credit (computed amount will be used in computing all of using the rules described in How to Line 15. Nondeductible CFC the corporation’s credits other than the Compute Business Credits below). Dividends foreign tax credit and the credit for prior • Do not take nondeductible CFC year minimum tax. Subtract line 13 from line 11. (This also dividends (or the tax thereon) into

equals 15% of line 11.) The amount Line 21 account on any line of Form 4626.

entered on line 15 is the amount of Enter the portion of the foreign tax credit The above steps produce the AMT nondeductible CFC dividends (as defined that is eligible to reduce the tax on computed without regard to nondeductible in section 965(e)(3)). The corporation’s nondeductible CFC dividends. Enter the CFC dividends. Enter this AMT amount taxable income (Form 1120, line 30)

cannot be less than this amount (see amount from Part IV, line 38, on Form on Form 8895, line 25, and on Form

8895, line 21. If Part IV was completed for 1120, Schedule J, line 4. section 965(e)(2)(A)). For more more than one separate category, enter information, see Notice 2005-64, Section See Notice 2005-38, Section 9.01, and the sum of all amounts entered on Part 7. Notice 2005-64, Sections 9.02, 9.03, IV, line 38, on Form 8895, line 21. 9.05, and 9.06, for more information. Part III–Regular Tax In the rare event that the sum of

all amounts entered on Part IV, How to Compute Business Liability for Computing CAUTION line 38, exceeds the amount Credits !

Credit Limitations and shown on line 19, enter on line 21 the Section 965(e)(1) indicates that, for

Alternative Minimum Tax amount shown on line 19. purposes of computing every business

credit other than the foreign tax credit and Line 22 Line 16. Corporation’s Taxable the credit for prior year minimum tax, Subtract line 21 from line 19. This is the “regular tax” does not include any tax “by Income amount of tax on nondeductible CFC reason of” nondeductible CFC dividends. Enter the corporation’s taxable income dividends that remains after being The ordering of the credits further from Form 1120, line 30. reduced by the applicable portion of the complicates the calculation of any

How to Compute NOLs foreign tax credit. You will need this business credit the corporation may be number to compute the credit limit on the entitled to claim. Taking these rules into Section 965(e)(2)(B) states that credit for prior year minimum tax and the account, complete the applicable forms nondeductible CFC dividends are not qualified zone academy bond credit (see for the business credits as follows: taken into account in determining: How to Compute Business Credits • Taxable income for the current year for Foreign tax credit. See the below). The only remaining credit (after purposes of determining the portion of the instructions for Part IV on page 3. the foreign tax credit) that may be used to NOL of any “loss year” that may be reduce this line 22 amount is the credit for Possessions tax credit. Complete carried over to the current tax year and the prior year minimum tax. Do not use Form 5735 as instructed on that form, • The amount of any NOL for the current any of the intervening credits (defined with the following exception: Do not tax year that may be carried over to other below) to reduce this line 22 amount. include on Form 5735, line 14, any tax on tax years. Intervening credits. These credits nondeductible CFC dividends (Form Therefore, if the corporation’s taxable 8895, Part III, line 19). Enter the credit include any credit that a corporation may income before the NOL deduction (i.e., take that is ordered between the foreign from Form 5735, line 17 or 27, on Form Form 1120, line 28, minus Form 1120, 1120, Schedule J, line 6b. tax credit and the credit for prior year line 29b) exceeds the amount of

nondeductible CFC dividends reported on minimum tax. Intervening credits include All other intervening credits. See

Form 8895, line 15, use the excess the possessions tax credit, the the instructions for line 22 above for the

amount for purposes of determining the nonconventional source fuel credit, the definition of intervening credit. To

portion of the NOL of any “loss year” that QEV credit, and the general business compute these credits, complete the

may be carried over to the current tax credits. applicable form(s) as instructed on that

year. If the corporation’s taxable income form(s), with the following exceptions: Line 23 before the NOL deduction (i.e., Form • On the “regular tax before credits” line

1120, line 28, minus Form 1120, line 29b) Subtract line 21 from line 39. This is the of the applicable credit form, you must

is less than or equal to Form 8895, line portion of the foreign tax credit that enter the tax on taxable income excluding

15, the corporation is not entitled to an reduces the tax on taxable income nondeductible CFC dividends (Form

NOL deduction for the current tax year. In excluding nondeductible CFC dividends. 8895, Part III, line 20). This is because

this case, enter on Form 1120, line 30, You will need this number when you may not use the amount of any

the amount from Form 8895, line 15, and computing the credit limit on all of your business credit (other than the foreign tax

enter -0- on Form 1120, line 29a. Use the intervening credits (see How to Compute credit or the credit for prior year minimum Business Credits below). excess of Form 1120, line 30, over the tax) to reduce the tax on nondeductible

corporation’s taxable income before the CFC dividends. See section 965(e)(1).

NOL deduction (i.e., Form 1120, line 28, Line 25. Alternative Minimum • If there is an “alternative minimum tax”

minus Form 1120, line 29b) as the NOL Tax line on the credit form, you must enter on

for the current tax year that may be Complete the corporation’s alternative that line the amount from Form 8895, line

carried over to other tax years. minimum tax (AMT) on Form 4626 as 25.

follows: • On the “foreign tax credit” line, you Line 19 • Enter on Form 4626, line 1, the amount must enter only the amount of the foreign

Enter the smaller of line 18 or 35% of line from Form 8895, line 17, plus the NOL tax credit that reduces the tax on taxable

15. This is the corporation’s tax on deduction from Form 1120, line 29a income excluding nondeductible CFC

nondeductible CFC dividends. This tax (which is computed using the NOL rules dividends (Form 8895, line 23).

amount may only be reduced by the in the instructions for line 16 above). • If there is a “tentative minimum tax” line

foreign tax credit and the credit for prior • Enter on Form 4626, line 11, the on the credit form, you must enter on that

year minimum tax. See section 965(e)(1) portion of the AMTFTC that is attributable line the amount from Form 4626, line 12

and How to Compute Business Credits to income other than nondeductible CFC (calculated in accordance with the

below for details. dividends. See Notice 2005-64, Section instructions for line 25 above).

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Enter the credit from that form on the Complete the following steps to • Line 36. Enter the foreign tax credit

applicable line of Form 1120, Schedule J. determine the corporation’s foreign tax computed for the separate category on

credit. the corporation’s preliminary Form 1118, Example. The corporation 1. Complete a preliminary Form Schedule B, Part III. The corporation’s completes Form 3800, General Business 1118. In doing so, complete Form 1118 preliminary Form 1118 is the Form 1118 Credit, as instructed on that form, with the as instructed on that form and referred to in step 1 above. following exceptions: accompanying instructions, and be sure • Line 37. Enter the smaller of line 35 • Enter the amount from Form 8895, line to: or line 36. This is the corporation’s 20, on Form 3800, line 9 (regular tax allowable foreign tax credit for the before credits). • Include in Schedule A, column 2 or separate category (the lesser of the • Enter the amount from Form 8895, line 3, as applicable, all dividends received or corporation’s regular section 904 25, on Form 3800, line 10 (alternative deemed received from CFCs (regardless limitation or the section 965(e) limitation minimum tax). of whether they qualify for the section 965 for the separate category). If line 35 is • Enter the amount from Form 8895, line DRD or whether they are deductible or smaller than line 36, substitute the 23, on Form 3800, line 12a (foreign tax nondeductible under section 965). revised credit amount from this line 37 for credit). • Use the amount on Form 8895, line the amount tentatively figured on the • Enter the amount from Form 4626, line 18, with respect to the portion of Form applicable line of Schedule B, Part III, of 12 (calculated in accordance with the 1118, Schedule B, Part II, line 9, which the corporation’s preliminary Form 1118. instructions for line 25 on page 2) on refers to “regular tax liability.” Enter on the dotted line to the left of the Form 3800, line 16 (tentative minimum • Pencil in (or otherwise tentatively applicable entry space “from Form 8895, tax). show) the corporation’s preliminary Part IV, line 37.”

Include the credit from Form 3800, line foreign tax credit amounts on Form 1118, 3. Compute the corporation’s revised Schedule B, Part III. 19, on Form 1120, Schedule J, line 6d. foreign tax credit for all separate

• Include on Schedule G, line E, all categories and enter the result on Form Credit for prior year minimum tax. taxes paid, accrued, or deemed paid that 8895, line 39, and on Form 1120, Complete Form 8827, Credit for Prior are attributable to the deductible portion Schedule J, line 6a. See the instructions Year Minimum Tax–Corporations, as of qualifying dividends (Form 8895, line for line 39 below for details. instructed on that form, with the following 13). exception: If the answer to the question With respect to the last bulleted item For additional information, see Notice on line 6 is “No,” enter on Form 8827, line above, the corporation may specifically 2005-64, Section 9.02. 6, the tentative minimum tax for the identify which dividends are treated as current year determined as if the amount Line 38 of nondeductible CFC dividends was qualifying dividends. This specific

identification is made by entering the Enter the smaller of line 31 or line 34. included on Form 4626, line 1, and the qualifying dividends on Form 8895, Part This amount is used to determine the creditable tax attributable to

V, column (e). In the absence of such a portion of the foreign tax credit that may nondeductible CFC dividends was

specification, a pro rata portion of each be used to reduce the tax on included on Form 4626, line 11. For more cash dividend repatriated during the tax nondeductible CFC dividends (see information, see Notice 2005-64, Section year is treated as a qualifying dividend. instructions for line 21 on page 2). 9.04.

See Notice 2005-64, Section 3.02. The Enter the amount from Form 8827, line corporation may not claim a credit or Line 39

8, on Form 1120, Schedule J, line 6e. deduction for 85% of the foreign taxes Enter the corporation’s revised foreign tax

Qualified zone academy bond paid, accrued, or deemed paid with credit on line 39. If the corporation

credit. respect to qualifying dividends. See entered revised amounts on Schedule B, If the corporation is claiming a

qualified zone academy bond credit, Notice 2005-64, Section 4, for more Part III, of its preliminary Form 1118 (see

complete Form 8860 as instructed on that information. the instructions for line 37 above),

refigure Form 1118, Schedule B, Part III, form, with the following exceptions: 2. Complete Form 8895, Part IV, lines • Enter the amount from Form 8895, line lines 9, 10, and 11, and enter the revised 26 through 37, for each separate category 20, on Form 8860, line 4 (regular tax that contains nondeductible CFC amount of the foreign tax credit (Form

before credits). 1118, Schedule B, Part III, line 11) on dividends. If you have nondeductible CFC • Enter the amount from Form 8895, line Form 8895, line 39, and on Form 1120, dividends in more than one separate 25, on Form 8860, line 5 (alternative Schedule J, line 6a. Otherwise, enter the category, attach additional Parts IV to minimum tax). Form 8895. Complete lines 26 through 37 amount of the foreign credit from

• Enter the amount from Form 8895, line Schedule B, Part III, line 11, of the using the following line instructions. 23, on Form 8860, line 7a (foreign tax corporation’s preliminary Form 1118 on • Line 28. Subtract line 27 from credit). Form 8895, line 39, and on Form 1120, Schedule B, Part II, line 6, of the • Enter the excess, if any, of the amount Schedule J, line 6a (i.e., the amounts corporation’s preliminary Form 1118 (see from Form 8827, line 8, over the amount computed in the corporation’s preliminary step 1 above). This is the corporation’s from Form 8895, line 22, on Form 8860, Form 1118, Schedule B, Part III, are the foreign source taxable income exclusive line 7g (credit for prior year minimum tax). amounts to be used on the corporation’s of the nondeductible CFC dividends in the actual Form 1118, Schedule B, Part III). Enter the amount from Form 8860, line separate category.

9, on Form 1120, Schedule J, line 6f. • Line 29. Subtract line 27 from The amount on Form 8895, line

Schedule B, Part II, line 7c, of the 39, is generally not the amount to

Part IV–Foreign Tax corporation’s preliminary Form 1118 (see CAUTION enter on the foreign tax credit line

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step 1 above). This is the corporation’s of most business credit forms. See the Credit–Additional worldwide taxable income exclusive of the instructions for line 23 on page 2 and

Limitation for Separate nondeductible CFC dividends in the How to Compute Business Credits on

separate category. page 2 for details. Categories With • Line 32. Subtract line 31 from

Nondeductible CFC Schedule B, Part II, line 9, of the Part V–Schedule of

corporation’s preliminary Form 1118 (see Dividends step 1 above). This is the corporation’s Dividends

pre-credit U.S. tax on its worldwide List in Part V all gross “cash dividends” See Notice 2005-64 for rules taxable income exclusive of the the corporation received from all CFCs pertaining to the foreign tax credit nondeductible CFC dividends in the during the tax year. See Notice 2005-64, CAUTION and expense allocation.

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separate category. Section 3.01, for more information.

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Column (c) specifically identifying as qualifying income for each tax year with respect to

dividends. For any line amount specified, all CFCs but for section 959(a). For any Enter in column (c) the functional the amount entered in column (e) will tax year, do not include in column (c) any currency amount and the U.S. dollar generally equal the amount in column distribution that is attributable to an amount of all gross “cash dividends” the (c)(2). However, on one line only, the amount included in column (b) for a prior corporation received from all CFCs during amount entered in column (e) may be tax year. the tax year. See Notice 2005-64, Section smaller than the amount entered in 3.04, for more information. The total of Line 51 column (c)(2), if that smaller column (e) column (c)(2) should equal the amount amount is the amount needed to reconcile Divide line 50 by 3. If the corporation has reported on line 1 of the form. fewer than 5 tax years in its base period, the total of all amounts entered in column

Column (d) (e) with the amount of qualifying see the Note at the beginning of these

dividends reported on line 11 of the form. Part VI instructions. Enter the line 51 For each cash dividend reported in Part See Notice 2005-64, Section 3.02, for amount on line 4 of the form. V, check the box in column (d) if the

dividend is a section 965(a)(2) amount. more information.

Section 965(a)(2) provides that if, within Paperwork Reduction Act Notice. We

the tax year for which the section 965 Part VI–Section 965(b)(2) ask for the information on this form to

election is in effect, the corporate U.S. Base Period Amount carry out the Internal Revenue laws of the

shareholder receives a cash distribution United States. You are required to give us Note. If the corporation has fewer than 5 from a CFC that is excluded from gross the information. We need it to ensure that tax years in its base period (i.e., tax years income under section 959(a), such you are complying with these laws and to ending on or before June 30, 2003), the distribution shall be treated for purposes allow us to figure and collect the right corporation’s base period includes all of of section 965 as a cash dividend to the amount of tax. its tax years ending on or before June 30, extent of any amount included in income You are not required to provide the 2003. In this case: by such U.S. shareholder under section information requested on a form that is • Do not complete lines 47 through 50. 951(a)(1)(A) as a result of any cash subject to the Paperwork Reduction Act • On line 51, divide line 46 by the dividend during such tax year to: number of base period years of the unless the form displays a valid OMB • Such CFC from another CFC that is in control number. Books or records relating corporation. a chain of ownership described in section to a form or its instructions must be 958(a) or See Notice 2005-38, Sections retained as long as their contents may • Any other CFC in such chain of 2.02, 3, 6, and 10, for rules for become material in the administration of ownership from another CFC in such adjusting the calculation of the any Internal Revenue law. Generally, tax CAUTION

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chain of ownership, but only to the extent amounts to be entered in columns (a) returns and return information are of cash distributions described in section through (c) to take into account mergers, confidential, as required by section 6103. 959(b) that are made during such tax year acquisitions, and spin-offs. Do not take The time needed to complete and file to the CFC from which such U.S. into account any changes in amounts this form will vary depending on individual shareholder received such distribution. reported on an amended return filed after circumstances. The estimated average If stock of an acquiring CFC is deemed June 30, 2003. See Notice 2005-64, time is: Recordkeeping, 18 hr., 53 min.; to be issued to another CFC pursuant to Section 10.02, for additional information. Learning about the law or the form, 2 section 304(a)(1), the acquiring CFC is Column (a) hr., 15 min.; Preparing and sending the treated as being in a chain of ownership form to the IRS, 3 hr., 51 min. described in section 958(a) for purposes Enter the amount of dividends the

corporation received during each tax year If you have comments concerning the of applying section 965(a)(2). See Notice accuracy of these time estimates or 2005-38, Section 9.04, for an example. from all CFCs.

suggestions for making this form simpler,

Attach to Form 8895 a statement Column (b) we would be happy to hear from you. See

that identifies the lower tier CFC Enter the total amount includible in the the instructions for the tax return with

that paid the cash dividend and corporation’s gross income for each tax which this form is filed. CAUTION

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the CFC that received the dividend, year under section 951(a)(1)(B) with

resulting in the U.S. shareholder’s income respect to all CFCs.

inclusion, and distributed cash (whether Column (c) directly or through one or more tiers of

CFCs) to the corporate U.S. shareholder. Enter the total amount that would have

been included in the corporation’s gross Column (e)

Show in column (e) which column (c)(2)

line amounts the corporation is

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