Foreign Company Dividend US Tax: Qualified or Already Taxed?

Is a dividend from my own foreign company taxable in the US?

Yes. A dividend from a company formed abroad is taxable on a US citizen's or resident's return, even though the company already paid tax where it operates. The one broad exception is a payout of earnings you were already taxed on under the controlled foreign corporation (CFC) rules: section 959 keeps those earnings from being taxed a second time. If you made a section 962 election for those earnings, part of the payout is taxable again (see below).

Three questions settle most cases:

A case is not simple when you own 10% or more of a CFC, made a section 962 election in an earlier year, never kept the yearly record of previously taxed earnings, the payout is larger than the company's earnings, or the company kept profits from years before you became a US citizen or resident (those were never taxed to you in the US, so paying them out now is a taxable dividend). For how the profits are taxed before any dividend, see US owners of foreign companies.

What to gather:

• The board resolution or bank record showing the date, amount and currency of each payout
• The company's earnings and profits by year, and your past Forms 5471, including Schedule P
• Past returns showing any net CFC tested income, subpart F income or section 962 election
• The foreign withholding statement or receipt
• Proof the company is resident in its treaty country, such as its local tax registration
• The exchange rate on each payout and withholding date, and its source
• Your cost basis in the shares

Which foreign companies pay qualified dividends?

A dividend is qualified only if the payer is a qualified foreign corporation, the company was not a PFIC in the year of the dividend or the year before, and you held the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date (Publication 550). A foreign company is a qualified foreign corporation if any one of these is true:

The treaty list in Notice 2024-11 includes Canada, China, Japan, Korea, India, the United Kingdom and most of Europe. Hong Kong is not on the list, and neither are other places without a comprehensive US income tax treaty. A private Hong Kong company with no US-listed shares and no treaty residence elsewhere therefore generally pays ordinary, not qualified, dividends.

A CFC's dividends from earnings that were never taxed in the US can be qualified if the CFC meets these tests (Publication 550). A small company holding mostly cash or investments may be a PFIC instead, though not for a 10% owner while it is a CFC (section 1297(d)); see the PFIC rules.

I was already taxed on the profits under the CFC rules. Is the dividend tax-free?

Yes, to the extent the payout comes from previously taxed earnings and profits (PTEP). Section 959 excludes from income earnings that were included under section 951(a), and section 951A applies the same treatment to net CFC tested income (called global intangible low-taxed income, or GILTI, in earlier years). Under section 959(c), a payout comes first from PTEP and only then from untaxed earnings, which are a taxable dividend.

The exclusion depends on records. The Form 5471 instructions require each US shareholder in the main filer categories to keep Schedule P, which tracks PTEP by year and group in the company's currency and your US-dollar basis in it. Without that history, a payout can look like a fresh dividend and be taxed twice. Rebuilding it means going back to each year's earnings and inclusions; see books for a small foreign company.

A PTEP payout also lowers your basis in the shares. If it exceeds that basis, the excess is gain.

Is there a currency gain or loss when previously taxed earnings are paid out?

Usually, yes. Section 986(c) taxes the change in exchange rate between the year the earnings were taxed to you and the day they are paid out. The gain or loss is ordinary and has the same source as the original inclusion. The Form 5471 instructions ask for it when PTEP is distributed.

The US-dollar basis on Schedule P is the starting point. If the company's currency rose against the dollar since the inclusion, there is a gain; if it fell, a loss.

I made a section 962 election in earlier years. How are later dividends taxed?

The payout is taxable to the extent it exceeds the US tax you paid on those earnings in the election year. Section 962(d) overrides the section 959 exclusion for earnings covered by the election. The election taxed the inclusion at corporate rates and let you claim a credit for the company's foreign tax; the trade-off is this second layer when the cash comes out.

Whether that taxable part is a qualified dividend turns on the same qualified foreign corporation tests above, so a company in a non-treaty place pays ordinary rates on it. An election cannot be revoked without IRS consent. Track each election year's inclusion and tax paid, because those figures set the taxable amount years later. If they were never kept, they have to be rebuilt from each election year's return before the payout can be reported; see cross-border tax help.

Foreign tax withheld on the dividend: how is the credit claimed?

Claim it on Form 1116, in the category the dividend belongs to. If the dividend is qualified, the Form 1116 instructions make you scale it down on line 1a by a set factor for the capital-gain rate it was taxed at, so the limit matches the lower rate you paid, unless your foreign qualified dividends and capital gain distributions total less than $20,000 and you meet the other part of the adjustment exception. For an owner of 10% or more of a CFC, a dividend is not automatically passive: look-through rules assign it to passive category only to the extent it comes from the CFC's passive income. An active trading company's dividend usually lands in general category.

Withholding above the treaty rate is not creditable (Form 1116 instructions); claim the excess back from the other country.

If a Canadian corporation withheld more than the treaty rate, how to get it applied or refunded is in non-resident owners of a Canadian corporation.

Withholding on a PTEP payout can still be claimed on Form 1116, even though the payout itself is not income. The tax goes in the same category as the earlier inclusion. For PTEP from net CFC tested income (GILTI) that is the section 951A category, which has no carryover (section 904(c)) and usually little income in the payout year, so much of the tax may go unused. The credit is also cut by 10% for that PTEP (section 960(d)(4)). The cut applies after June 28, 2025, but the law is unclear whether that date tests the tax or the inclusion, so a payout of older PTEP needs a check. PTEP from the one-time section 965 transition tax also carries only a partial credit. Section 960(c) may raise your limit through an excess limitation account (Form 1116 instructions).

A dividend from your own company usually needs Form 1116, because the no-Form-1116 shortcut needs a payee statement such as Form 1099-DIV. For limits, carryovers and which withholding counts, see foreign tax credit limits and baskets.

Does net investment income tax apply to the dividend?

Yes, a taxable dividend counts as net investment income. The 3.8% tax applies when modified adjusted gross income is above $200,000 for a single filer or $250,000 for a joint return (Form 8960 instructions). The foreign tax credit cannot reduce it: the IRS says foreign income tax credits are allowed only against regular income tax (IRS questions and answers).

PTEP payouts need a check too. This tax counts CFC income when the cash is paid out, unless you elected to count it in the year it was taxed to you (Regulations section 1.1411-10(g)). Without that election, a PTEP payout that is tax-free for income tax is generally added on Form 8960, line 6, and to modified adjusted gross income, so it can also push you over the threshold (Form 8960 instructions). With it, the earlier inclusions counted in their own year and the payout is left out. Your past Forms 8960 show which way you went.

No Form 1099-DIV: where does it go on the return, and which exchange rate?

Report it anyway. A foreign company usually issues no Form 1099-DIV, and Publication 550 says all dividend income must be reported regardless. Put the taxable dividend on Form 1040, line 3b, and the qualified part on line 3a; the PTEP part stays off both lines. Ordinary dividends over $1,500 go through Schedule B, Part II, with the company named as payer; Part III of that schedule asks about foreign accounts and foreign trusts (Schedule B instructions).

Translate each payout into US dollars at the exchange rate on the day you receive it (IRS exchange-rate guidance). Keep the rate and where it came from with the board resolution.

What if the payout is bigger than the company's earnings?

The part above current and accumulated earnings is not a dividend. Under section 301(c), it first reduces your basis in the shares, then any amount above basis is gain from selling the shares (Publication 550). This depends on earnings and profits figured under US rules, which can differ from the company's local accounts. For a sale of the shares and section 1248, see selling your foreign company.

Example

All figures are in US dollars and illustrative.

A Chinese company, profits never taxed in the US

An owner receives a $100,000 dividend from a Chinese company's earnings built up before the owner became a US resident, so they were never taxed in the US. China withholds $10,000 at the treaty ceiling. The company qualifies under the treaty test and is not a PFIC, so the dividend is qualified: at a 15% rate, US tax before credit is $15,000. The $10,000 goes on Form 1116, usually in general category for an active trading company. Because the dividend is qualified and too large for the adjustment exception, line 1a shows $100,000 × 0.4054 = $40,540, not $100,000; the Form 1116 limit then decides how much of the $10,000 reduces the $15,000. If modified adjusted gross income is over the net investment income tax threshold, another $3,800 (3.8% of $100,000) is due, and the Chinese withholding cannot reduce it.

A Hong Kong company taxed each year under the CFC rules

An owner was taxed on $150,000 of GILTI (now net CFC tested income) over earlier years. The company pays out $200,000:

1. The first $150,000 comes from PTEP and is excluded, though it lowers share basis and may carry a currency gain.
2. The other $50,000 is a dividend from untaxed earnings.
3. Hong Kong has no qualifying treaty and the shares do not trade in the US, so the $50,000 is generally an ordinary dividend.

Earlier section 962 elections

An owner elected section 962 on a $100,000 subpart F inclusion and paid $21,000 of US tax on it, after no foreign tax credit. Later the company pays out that $100,000. Under section 962(d), $79,000 is taxable as a dividend, qualified only if the company passes the qualified foreign corporation tests. For a net CFC tested income inclusion, the tax paid, and so the taxable part, differs.

Different for you?

• You owe tax on the profits before any dividend, or never filed Form 5471: see US owners of foreign companies and late Form 5471, and get cross-border tax help.
• Your PTEP or section 962 history was never tracked: rebuilding years of earnings and Schedule P is a cross-border tax job; start with books for a small foreign company.
• You moved to the US and still own a Canadian corporation: profits kept from before the move are a taxable dividend when paid out; see non-resident owners of a Canadian corporation and get cross-border tax help.
• You hold a green card and the company is in mainland China: see green card holder with a company in China.
• The company is in Hong Kong: see US owner of a Hong Kong company.
• You are selling the shares: see selling your foreign company.
• A US corporation, not you, receives the dividend: see US parent of a foreign operating company.
• The company is a fund or holds mostly investments: see the PFIC rules.
• You live in Canada and own a Canadian corporation: see American owners of Canadian corporations.
• Form 1116 limits or carryovers: see foreign tax credit limits and baskets.