A dividend distribution to a foreign parent of a US subsidiary would be taxed as US source income to the foreign parent. When a foreign business operates a branch in the US, the IRS imposes branch tax on the US branch profit in order to put the US branch on equal footing with a US subsidiary of a foreign business.

Branch profits and branch interest taxes equalize the treatment of US subsidiaries of foreign businesses and US branches of foreign businesses. The branch profits tax imposes a tax on the net profits of a US branch, “the dividend equivalent amount,” that would otherwise escape US tax on dividends, unless the net profits are reinvested in the US. Meanwhile, the branch level interest tax recharacterizes the US branch of a foreign company as a US subsidiary so that the interest paid is US source income and taxable in the US.

The dividend equivalent amount is calculated as the current-year effectively connected E&P less the increase in U.S. net equity of the foreign corporation during the tax year. Alternatively, the dividend equivalent amount is the connectively connected E & P plus the decrease in U.S. equity. The term “US assets” means money and aggregate adjusted bases of property of the foreign corporation treated as connected with the conduct of the US trade or business.  The regulations define the term “US liabilities” by multiplying a foreign corporation’s total US assets as of the determination date (close of tax year) by either Actual ratio of worldwide liabilities/worldwide assets or fixed ratio: 93% for banks and 50% for non-banks.  Basis adjustments for E&P purposes could, for example, consist of depreciation adjustments to a straight-line method where an accelerated depreciation method was used for income tax purposes.