Explanatory Information
Reporting requirements for dividends paid by foreign corporations*
IRS guidance on information reporting of dividends paid by foreign corporations: Notice 2004-71, 2004-45 IRB
Effective for tax years beginning after 31 December 2003, IRS has extended simplified procedures that initially only applied to 2003 information reporting of foreign dividends to now also apply to 2004 information reporting.
Background
Under the 2003 Jobs and Growth Act, "qualified dividends" received by individuals are taxed at 15% (5% to the extent that the dividends would be taxed in the 10% or 15% brackets if they were treated as ordinary income). Dividends eligible for the reduced rates include dividends paid by a domestic corporation or a "qualified foreign corporation." A "qualified foreign corporation" includes certain foreign corporations that are eligible for treaty benefits. In addition, dividends paid by a foreign corporation on stock (or an ADR) that is readily tradable on a U.S. securities market qualifies for the lower rate.
Under a holding period test, for dividends on stock to qualify as qualified dividend income, the taxpayer must hold the stock for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. The 2004 Form 1099-DIV (the information return for dividends and certain other distributions) has separate boxes for identifying total ordinary dividends and total qualified dividends. In late 2003, IRS issued simplified procedures in Notice 2003-79, 2003-50 IRB 1206 for 2003 information reporting of foreign dividends on Form 1099-DIV (see RIA Weekly Alert Newsletter 12/04/2003).
Simplified procedures for 2004 reporting of foreign dividends. Notice 2004-71 provides that generally the simplified procedures and other rules contained in Notice 2003-79 (for 2003 information reporting) are extended to apply for 2004 information reporting of foreign dividends. IRS indicates that it still needs to issue more detailed guidance on the matter and is considering further comments. For foreign dividends paid in 2004, a distribution is to be reported as a qualified dividend if: - either the security with respect to which the distribution is made is a common or an ordinary share, or a public SEC filing contains a statement that the security will be, should be, or more likely than not will be, treated as equity rather than debt for US income tax purposes, and
either:
(1) the security is considered readily tradable on an established securities market in the US;
(2) the foreign corporation is organized in a possession of the US;
or
(3) the foreign corporation is organized in a country whose income tax treaty with the US is listed in Notice 2003-69, 2003-42 IRB 851, and if the relevant treaty contains a limitation on benefits provision, the corporation's common or ordinary stock is listed on an exchange covered by that limitation on benefits provision's public trading test, unless the person required to file an information return knows or has reason to know that the corporation is not eligible for benefits under that treaty. If the corporation has stated in its most recent SEC annual filing for the security that it is not eligible for treaty benefits, a person will have reason to know that fact, and
the person required to file Form 1099-DIV does not know or have reason to know that the foreign corporation is, or expects to be, in the tax year of the corporation in which the dividend was paid or was, in the preceding tax year, a foreign personal holding company (FPHC), foreign investment company (FIC), or passive foreign investment company (PFIC). A person has the requisite reason to know if the corporation has stated in its most recent annual public filing with the SEC that it is or expects to be a FPHC, FIC, or PFIC; and
- the person required to make the return determines that the owner of the distribution has satisfied the holding period test or it is impractical for the person to make such a determination. Thus, if it is impractical for the person to determine if the recipient has satisfied the holding period requirement, the recipient is to be treated as meeting the holding period.
IRS will waive penalties with respect to reporting of 2004 payments if persons required to file Form 1099-DIV make a good faith effort to report payments consistent with the above rules. A person required to make a return may report a distribution in Box 1b as a qualified dividend for 2004 even if the distribution does not satisfy these reporting procedures, subject to the applicable penalty provisions.
Dividend recipients
For tax years beginning in 2004, a recipient of Form 1099-DIV may treat amounts reported in Box 1b as qualified dividends, unless and to the extent that the recipient knows or has reason to know that the amounts are not qualified dividends.
More guidance on its way
IRS notes that it is developing procedures for implementing the certification approach for information reporting as outlined in Notice 2003-79, Sec. 5.
RIA observation: Presumably this guidance will be in the form of regulations that will require information return filers to report a distribution as a qualified dividend if the foreign corporation has certified certain characteristics of the dividend (see Notice 2003-79).
* Source: RIA Weekly Alert, 25 October 2004
Notice 2003-79, 2003-50 IRB
IRS has provided guidance to payors for information reporting of dividends paid in 2003 by foreign corporations. A recipient of a 1099-DIV with respect to a foreign payor showing a dividend as a qualified dividend may rely on it, unless the recipient knows or has reason to know that the dividend did not qualify.
Background
Under the 2003 Jobs and Growth Act, "qualified dividends" received by individuals are taxed at 15% (5% for taxpayers in the 10% and 15% brackets). Dividends eligible for the reduced rates include dividends paid by a domestic corporation or a "qualified foreign corporation." A "qualified foreign corporation" includes certain foreign corporations that are eligible for treaty benefits. In addition, dividends paid by a foreign corporation on stock (or an ADR) that is readily tradable on a US securities market qualifies for the lower rate.
A dividend paid on stock not held for more than 60 days in the 120-day period beginning 60 days before the ex-dividend date, is not a qualified dividend.
The 2003 Form 1099-DIV (the information return for dividends and certain other distributions) has separate boxes for identifying total ordinary dividends and total qualified dividends.
Simplified procedures for 2003 reporting of foreign dividends
IRS has provided simplified procedures for applying the reporting rules for foreign dividends paid in 2003. A distribution is to be reported as a qualified dividend if:
- either the security with respect to which the distribution is made is a common or an ordinary share, or a public SEC filing contains a statement that the security will be, should be, or more likely than not will be, treated as equity rather than debt for US income tax purposes; and either:
(1) the security is considered readily tradable on an established securities market in the US (see RIA Weekly Alert 10/9/2003);
(2) the foreign corporation is organized in a possession of the US; or
(3) the foreign corporation is organized in a country whose income tax treaty with the U. S. is listed in Notice 2003-69, 2003-42 IRB 851, and if the relevant treaty contains a limitation on benefits provision, the corporation's common or ordinary stock is listed on an exchange covered by that limitation on benefits provision's public trading test, unless the person required to file an information return knows or has reason to know that the corporation is not eligible for benefits under that treaty. If the corporation has stated in its most recent SEC annual filing for the security that it is not eligible for treaty benefits, a person will have reason to know that fact; and
- the person required to file Form 1099-DIV does not know or have reason to know that the foreign corporation is, or expects to be, in the tax year of the corporation in which the dividend was paid or was, in the preceding tax year, a foreign personal holding company (FPHC), foreign investment company (FIC), or passive foreign investment company (PFIC). A person has the requisite reason to know if the corporation has stated in its most recent annual public filing with the SEC that it is or expects to be a FPHC, FIC, or PFIC; and
- the person required to make the return determines that the owner of the distribution has satisfied the 60/120 holding period test or it is impractical for the person to make such a determination. Thus, if it is impractical for the person to determine if the recipient has satisfied the holding period requirement, the recipient is to be treated as meeting the holding period.
Illustration
A foreign corporation is incorporated in Austria and its common stock is traded on the Vienna exchange. The tax treaty with Austria is listed in Notice 2003-69 and the Vienna exchange is covered by the public trading test in the limitation on benefits provision of the treaty. A person required to make a return treats the corporation as satisfying the treaty test unless the person knows or has reason to know that the corporation is not eligible for the treaty benefits.
IRS will waive penalties with respect to reporting of 2003 payments if persons required to file Form 1099-DIV make a good faith effort to report payments consistent with the above rules. A person required to make a return may report a distribution in Box 1b as a qualified dividend for 2003 even if the distribution does not satisfy these reporting procedures, subject to the applicable penalty provisions.
For tax years beginning in 2003, a recipient of Form 1099-DIV may treat amounts reported in Box 1b as qualified dividends, unless and to the extent that the recipient knows or has reason to know that the amounts are not qualified dividends.
Regs are coming
For 2004 and later, IRS intends to issue regs that will require information return filers to report a distribution as a qualified dividend if the foreign corporation has certified that: - for any security that is not a common or an ordinary share (eg, preferred stock), the security is equity rather than debt for US income tax purposes;
- where a security is not readily tradable on an established securities market in the U.S. and where the foreign corporation is not incorporated in a possession, the foreign corporation is eligible for the benefits of a tax treaty with the US; and
- the foreign corporation is not, in the tax year of the corporation in which the dividend was paid, and was not, in the preceding tax year, a FPHC, FIC, or PFIC Certifications are expected to be made annually and made available to the public. For publicly traded companies, it is expected that the regs will provide that the certification may be made in a public SEC filing (such as in a Form 20-F).
* Source: RIA Federal Taxes Weekly Alert, 04 December 2003
|
