Non Liquidation Distribution from a "C" Corp...

[hjasin]

Hi !!

When a C Corp is owned 100% by a Foreign entity, and the "C" corp had income in year 2017 and paid its taxes....and year 2018 & year 2019 had NOLs, which exceeded income in year 2017... making the Retained Earnings as of 12/31/2019 in a negative amount...

Assuming the Accumulated E&P is negative amount... if we paid a distribution to the C Corp only Foreign shareholder:

1) Do we need to withhold 30% of such distribution..?

2) and if it is no withholdings (as it would not be considered a Dividend), it would be considered Capital reduction...do we need to file any specific forms, reporting such distribution..or it is only reported in form 1120, schedule M-2, box 5 " cash distribution" ...

Thanks!

Hernan Jasin

[IntuitJim]

1) Possibly, unless there is an exception. 

https://www.irs.gov/publications/p515#en_US_2020_publink100015245

Income Subject to Withholding

This section explains how to determine if a payment is subject to Chapter 3 withholding or is a withholdable payment.

Amounts Subject to Chapter 3 Withholding

A payment is subject to Chapter 3 withholding if it is from sources within the United States, and it is fixed or determinable annual or periodical (FDAP) income. Generally, excluding gains but including certain gains from the disposal of timber, coal, and iron ore, or from the sale or exchange of patents, copyrights, and similar intangible property.

In addition, a payment is subject to Chapter 3 withholding if withholding is specifically required, even though it may not constitute U.S. source income or FDAP income. For example:

>>"corporate distributions may be subject to Chapter 3 withholding even though a part of the distribution may be a return of capital" or capital gain that is not FDAP income.