This is a provision to reduce the number of times an amount of earnings can be taxed: company A, which is paying the dividend, will have already been taxed on it, and the shareholders of company B will be taxed as well, so the Dividends Received Deduction alleviates taxes at the intermediary stage when Company B receives it.
The Dividends Received Deduction reduces the amount of taxes due on dividends which have been paid to a corporation from another corporation, in situations where the payee owns dividend-eligible stock of the payor.
Corporate earnings are infamously double-taxed as it is: an owner of a corporation, for instance, will have to allow the earnings to be taxed at a corporate level and then again at a personal level when they are distributed in various ways, with few exceptions.
It is not uncommon for companies to own interest in another company, and the dividends from the shares owned are in danger of being triple-taxed without this deduction. If a company owns less than 20% of the company paying the dividends, it can deduct 70% of the amount of dividends received from its own taxes.
In situations were a company owns over 80% of the dividend paying company, as its subsidiary, 100% of the dividends can be deducted; this is because they will file consolidated returns and will be considered one entity for tax purposes.
If a company owns less than 80% but more than 20%, 80% of the dividend paid by the affiliated company will be deductible per the dividends received deduction.
The simplest answer is: to make money! Owning shares of a company’s stock is known as taking a long position
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