Foreign Corporations Qualifying for JGTRRAs Reduced Dividend Rate

Notice 2003-71 defines stock considered readily tradable on an established securities market in the United States for purposes of the reduced tax rates on dividends paid by foreign corporations.

Background

The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA), Section 302(a), generally provides that dividends paid by either a domestic corporation or a qualified foreign corporation are subject to tax at reduced capital gain rates (generally, 15%). JGTRRA Section 302(a) added Sec. 1(h)(11), providing that net capital gain for purposes of Sec. 1(h) means net capital gain increased by qualified dividend income. Under Sec. 1(h)(11)(B)(i), qualified dividend income consists of dividends received during the tax year from domestic corporations and qualified foreign corporations (as defined in Sec. 1(h)(11)(C)(i)).

A foreign corporation that does not satisfy Sec. 1(h)(11)(C)(i)s two tests is nevertheless treated as a qualified foreign corporation under Sec. 1(h)(11)(C)(ii) for any dividends paid if its dividend-paying stock is readily tradable on an established securities market in the U.S. Dividends paid by a passive foreign investment company, foreign investment company or foreign personal holding company do not qualify.

Definition

Notice 2003-71 defines readily tradable on an established securities market in the United States as common or ordinary stock listed on a national securities exchange registered under Section 6 of the Securities Exchange of 1934 or on the National Association of Securities Dealers Automated Quotation system. As of Sept. 30, 2002, registered national exchanges include the American Stock Exchange, Boston Stock Exchange, Cincinnati Stock Exchange, Chicago Stock Exchange, New York Stock Exchange, Philadelphia Stock Exchange and the Pacific Exchange, Inc.

Notice 2003-71 provides that Treasury and the IRS are considering the treatment of dividends paid on stock that does not meet the definition in Notice 2003-71, including stock on the OTC Bulletin Board or on the electronic pink sheets. They request comments on that issue and on whether stock treatment should be conditioned on factors such as minimum trading volume or number of market makers, maintenance and publication of historical trade or quotation data, etc.

Conclusion

The notice provides no surprises, but gives the securities industry reliable guidance in starting the systems work needed to report properly the status of dividends paid by foreign corporations. It will be useful if the IRS can clarify the status of the OTC Bulletin Board and electronic pink sheets as quickly as possible.

From Marc Levy, Washington, DC