Question

Strap Corporation is the sole shareholder of X, Inc. Strap and X do not file a consolidated return, and Strap has held its X stock for more than two years. Strap has a $150,000 basis in its X stock. Boot is a prospective buyer and is willing to purchase all of the X stock, but he is unable to pay the $500,000 price demanded by Strap even though he believes it to be fair. X has $100,000 cash on hand and an ample supply of E&P. To solve these problems the parties have agreed on the following plan. Strap Corporation will cause X to distribute $100,000 to it as a dividend. Promptly thereafter, Strap will sell its X stock to Boot for $400,000.

(a) What are the tax consequences of this plan?

(b) What if Strap were an individual rather than a corporation?

Answer 1

1. Dividend received from a foreign company is taxable. It will be charged to tax under the head “income from other sources.” Dividend received from a foreign company will be included in the total income of the taxpayer and will be charged to tax at the rates applicable to the taxpayer subject to DTAAs with foreign countries. ... As discussed earlier, dividend received from a foreign company is taxed in the hands of a resident taxpayer at the normal rates applicable to his income. Normal tax rate applicable to an Indian company is 30% (plus surcharge and cess as applicable), hence, dividend received from a foreign company is charged to tax at 30% in the hands of an Indian company. However, section 115BBD provides a concessional rate of tax in respect ofdividend received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital. By virtue of section 115BBD, dividends [as defined in section 2(22) except dividend as defined in section 2(22)(e)] received by an Indian company from a foreign company in which the Indian company holds 26% or more in nominal value of the equity share capital is charged to tax at a flat rate of 15% (plus surcharge and cess as applicable).

2. No difference,

Assumed: Indian company receiving dividend from forign company.

2.