Qualified Dividend Income and Foreign Corporation Shares: A Few Areas of Uncertainty

Posted: 6 Nov 2003

Abstract

The rationale for extending the 15% maximum rate to certain types of dividends paid by foreign corporations is presumably relates to the general proposition against the double taxation of a U.S. investor's earnings. This implies that the 15% maximum rate will be extended to those dividends that are related to foreign corporation earnings that have been taxed meaningfully at the corporate level prior to being distributed to shareholders. Qualified dividend income (QDI) is received from a domestic corporation or a "qualified foreign corporation" (QFC).

Determining whether a corporation is a QFC requires understanding several tests - the U.S. Possession Test, the Treaty Based Test, the Regularly Tradable Test - which are described in the article. It is unclear whether a foreign corporation should be treated as a QFC with respect to a dividend paid to a U.S. individual shareholder who actually owns shares of such foreign corporation that are not themselves readily tradable on an established securities market in the U.S., but ADRs backed by the same class of shares are so traded. The cause of this confusion is the footnote found in the Conference Report. The article analyzes this issue in detail.

Suggested Citation

Dixon, William S., Qualified Dividend Income and Foreign Corporation Shares: A Few Areas of Uncertainty. Journal of Taxation and Regulation of Financial Institutions, Vol. 17, No. 1, September/October 2003, Available at SSRN: https://ssrn.com/abstract=461029

William S. Dixon (Contact Author)

Cravath, Swaine & Moore LLP ( email )

Worldwide Plaza
New York, NY 10019
United States
212-474-1000 (Phone)

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