Alhambra Corporation, a U.S. corporation, receives a dividend from its 100 percent owned Spanish subsidiary. For foreign tax credit purposes, the dividend will always be characterized as passive category income.
Under the look-through rules, the dividend will be characterized based on the type of income from which it was paid.

Question

Quizplus · Accepted Answer

The statement is incorrect. Under the look-through rules, the dividend will be characterized based on the type of income earned by the subsidiary, not the type of income from which the dividend was paid. Therefore, if the subsidiary earned active income, the dividend will be characterized as active income for foreign tax credit purposes.