blogger visitor

Thursday, November 09, 2006


Section 1(h)(11) of the Internal Revenue Code provides that qualified dividends received by an individual shareholder are taxed as net capital gain. This presently results in a a 5% or 15% tax rate.

When the dividend payor is a foreign corporation, the rate only applies to foreign corporations eligible for the benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory and which includes an exchange of information program. However, the special treatment also applies to foreign corporations whose stock is publicly traded.

In 2003, the IRS published a list of countries whose corporations meet these requirements. Recently, in Notice 2006-103, the IRS has revised that list.

New to the list are Barbados, Sri Lanka, and Bangladesh. The IRS notes that U.S. agreements with Bermuda, the Netherlands Antilles, and those former Soviet Republics still covered by the old U.S. - U.S.S.R. treaty are insufficient to provide net capital gains treatment for dividends issued by corporations of those countries.

Note that dividends of passive foreign investment companies (PFICs) do not qualify for this net capital gain treatment. Also, dividend recipients who do not meet certain minimum holdings periods also cannot get the benefit of the capital gains treatment.

No comments: