Learn what the dividends-received deduction is, who can claim it, and why it matters when one corporation owns stock in another.
The dividends-received deduction (DRD) is a corporate tax deduction that lets one corporation exclude part of the dividends it receives from another corporation from taxable income. The basic policy goal is to reduce repeated layers of corporate taxation on the same earnings as profits move through corporate ownership chains.
The DRD generally applies to corporations receiving eligible dividends from domestic corporations, subject to ownership and holding-period rules. The percentage that can be deducted usually depends on how much of the dividend-paying corporation the recipient owns. Greater ownership generally allows a larger deduction because the tax system treats the intercorporate relationship more like a continuation of the same economic capital base.
This matters because without a deduction like the DRD, the same corporate earnings could be taxed repeatedly as they pass from one corporation to another before reaching an individual investor. The rule therefore affects corporate group structures, investment decisions, and after-tax returns on intercorporate holdings.