What is dividends received deduction?
This is a reduction in dividend tax granted to a company to cover dividends received from part ownership in another business. The idea behind dividends received deduction (DRD) is to soften the blow of triple taxation.
Where have you heard about dividends received deduction?
It applies to the tax system in the US, where two levels of tax are imposed on corporate profits - one paid by a company, and the other paid on dividends received by the company’s individual shareholders. The DRD eases the burden of three or more levels of tax.
What you need to know about dividends received deduction.
If a company receives dividends from another business, it’s allowed to deduct 70% of those dividends. In effect, that slashes the tax rate on dividends from a top corporate rate of 35% down to 10.5%.
However, there are some limitations on the deductions. If a company is permitted to deduct 70% of the dividends from its taxable income, the deduction cannot exceed 70% of its own taxable income. The DRD only applies to shares that the company has held for at least 45 days.
Find out more about dividends received deduction.
Read our definition of dividend tax for more information on dividend payments.