There are four tests that must be met for a foreign tax to qualify for the Foreign Tax Credit.
- The tax is an income tax or it's equivalent
- It is the legal and actual foreign tax liability
- It must be imposed on the taxpayer
- Tax must have been owed and paid (or accrued for an accrual-based taxpayer)
What foreign taxes are not eligible for the Foreign Tax Credit?
The following are foreign taxes paid that are NOT eligible for the Foreign Taxes Paid Credit:
- Taxes paid to a foreign country that you were not legally obligated to pay or owe.
- Taxes imposed by and paid to foreign countries on which the U.S. does not have diplomatic relations with or countries not recognized by the U.S.
- Foreign taxes withheld on a dividend from a corporation, if you have not held the stock for at least 16 days within the 31-day period that begins 15 days before the ex-dividend date OR the dividends are for a period or periods totaling more than 366 days on preferred stock you held for less than 46 days during the 91-day period that begins 45 days before the ex-dividend date. This required holding period is greater for preferred-stock dividends attributable to periods totaling more than 366 days.
- Foreign taxes withheld on a dividend to the extent that you have to make related payments on positions in similar or related property
- Foreign taxes withheld on income or gain (other than dividends) from property if you have not held the property for at least 16 days within the 31-day period that begins 15 days before the date on which the right to receive the payment arises.
- Foreign taxes withheld on income or gain from property to the extent that you have to make related payments on positions in similar or related property.
- Payments of foreign tax that are returned to you as a subsidy.
- Taxes paid or accrued to a foreign country in connection with the purchase or sale of oil or gas extracted in that country if you do not have an economic interest in the oil or gas, and the purchase price or sales price is different from the fair market value of the oil or gas at the time of the purchase or sale.
- Foreign taxes paid or accrued on income for which you are claiming an exclusion on Form 8873, Extraterritorial Income Exclusion. However, see section 943 (d) for an exception for certain withholding taxes.
- The disqualified portion of taxes paid or accrued in connection with acquiring a covered asset (stepped-up basis).
- Foreign taxes disallowed under section 965(g).
You cannot take a credit for any interest of penalties you must pay. For full details see Publication 514.