A French subsidiary that earns $1 million before-tax pays French tax of $.5 million and remits the remaining $.5 million as a dividend to its U.S.parent.It pays a 10% dividend withholding tax on its remittance.Under current tax law,the parent will owe U.S.tax on this dividend equal to

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Under current U.S. tax law, the parent company is eligible for a foreign tax credit to avoid double taxation on income earned abroad. The French subsidiary paid $500,000 in local taxes and an additional $50,000 in dividend withholding tax, totaling $550,000 in foreign taxes. The U.S. parent can use this as a credit against any U.S. taxes owed on the dividend, effectively owing nothing in U.S. taxes on this income.

A French Subsidiary That Earns $1 Million Before-Tax Pays French