Foreign Qualified Dividends Eligibility Requirements and qualified foreign corporations; interaction with PFIC - Passive Foreign Investment Companies

1. Sherayzen Law Office, PLLC
sherayzenlaw.com
Foreign Qualified Dividends

2. Qualified Dividends Equals Lower
Income Taxes
 In U.S. tax law, classification of income plays a
very important role in determining your tax
liability.
 “Qualified Dividend” classification is very
important because it is subjected reduced tax
rates – as low as 15%
 Qualified Foreign Dividends are eligible for this
favorable tax treatment

3. History of Qualified Dividends
 Jobs and Growth Tax Relief Reconciliation Act of
2003 (enacted on May 28, 2003) added section
1(h)(11), which provides that net capital gain for
purposes of section 1(h) means net capital gain is
increased by “qualified dividend income.”
 Section 1(h)(11)(B)(I). Qualified dividend income
means dividends received during the taxable year
from domestic corporations and “qualified foreign
corporations.”
 Certain requirements apply (for example, see
holding period requirements of section
1(h)(11)(B)(iii)).

4. Qualified Foreign Dividends
 Foreign Dividend is Qualified Dividend if it meets:
Qualified Dividend Requirements + IRC Section
1(h)(11)(C)(i) Tests

5. Treaty Test
 Main Test: Foreign corporation is eligible for
benefits under a comprehensive income tax
treaty with the United States. The foreign
corporation must be a resident within the
meaning of such term under the relevant treaty
and must satisfy any other requirements of that
treaty, including the requirements under any
applicable limitation on benefits provision
 Finally, a treaty test is passed if the treaty is on
the list of the U.S. income tax treaties that met
the IRC requirements.

6. Effective Date of the Treaty
 It is always important to check the effective dates
for each of the treaty for determining when the
eligibility for the preferential IRC Section 1(h)(11)
arises.

7. Other Tests
 Second Test: If foreign corporation is incorporated
in a possession of the United States
 Third Test: If the stock with respect to which such
dividend is paid is readily tradable on an
established securities market in the United
States. (See Section 1(h)(11)(C)(ii) for more
information)

8. PFICs and Section 1(h)(11)
 If foreign corporation is a passive foreign
investment company (“PFIC”) as defined in
section 1297, its dividends are not eligible for
foreign qualified dividend treatment under Section
1(h)(11). See IRC section 1(h)(11)(C)(iii).

9. Foreign Qualified Dividends
 Contact Sherayzen Law Office For Help With
Foreign Dividend Planning
 Go to: http://sherayzenlaw.com