Generally speaking, the source for dividend income is the payor’s country of incorporation unless an exception is met. Thus, generally, U.S. corporations pay U.S. sourced income and foreign corporations pay foreign source income.
The following exceptions exist where the source for dividend income is not determined entirely by the payor’s country of incorporation.
Dividend income has a U.S. source when it is paid by a foreign corporation and at least 25% of the foreign corporation’s gross income for the immediately preceding three years (just prior to the dividend was declared) is effectively “connected with” its conducting a trade or business in the U.S. However, the amount of the dividend income that is considered “U.S. source” is calculated as the ratio between: the corporation’s “U.S. effectively connected income” over total gross income (from all sources foreign and domestic).
Dividend income has a U.S. source when the payor is a foreign corporation that is at least 50% owned (or is treated as being owned) by U.S. persons or entities, and at least 10% of the earnings and profits are attributable to U.S sources. The amount of the dividend income that is considered “U.S. source” is calculated as the ratio of the earnings and profits from U.S. sources over total earnings and profits from both U.S. and Foreign Sources for the tax year (Ordinarily via a calendar year).
Dividend income has a foreign source when a domestic corporation elects for a favorable tax regime for its activities in Puerto Rico (or a U.S. possession pursuant to IRC § 936).