The Jobs and Growth Tax Relief Reconciliation Act of 2003 (P.L. 108-27,
117 Stat. 752) (the “2003 Act”) was enacted on May 28, 2003.
Subject to certain limitations, the 2003 Act generally provides that a dividend
paid to an individual shareholder from either a domestic corporation or a
“qualified foreign corporation” is subject to tax at the reduced
rates applicable to certain capital gains. A qualified foreign corporation
includes certain foreign corporations that are eligible for benefits of a
comprehensive income tax treaty with the United States that the Secretary
determines is satisfactory for purposes of this provision and that includes
an exchange of information provision. On October 20, 2003, the Service published
Notice 2003-69, 2003-2 C.B. 851, which contains a list of the U.S. tax treaties
that met these requirements at that time. This notice updates the list of
U.S. tax treaties that meet these requirements to reflect new U.S. income
tax treaties and protocols that have entered into force since the publication
of Notice 2003-69.
Section 1(h)(1) of the Internal Revenue Code (the “Code”)
generally provides that a taxpayer’s “net capital gain”
for any taxable year will be subject to a maximum tax rate of 15 percent (or
5 percent in the case of certain taxpayers). The 2003 Act added section 1(h)(11),
which provides that net capital gain for purposes of section 1(h) means net
capital gain (determined without regard to section 1(h)(11)) increased by
“qualified dividend income.” Qualified dividend income means
dividends received during the taxable year from domestic corporations and “qualified
foreign corporations.” Section 1(h)(11)(B)(i). Subject to certain
exceptions, a qualified foreign corporation is any foreign corporation that
is either (i) incorporated in a possession of the United States, or (ii) eligible
for benefits of a comprehensive income tax treaty with the United States that
the Secretary determines is satisfactory for purposes of this provision and
that includes an exchange of information program (the “treaty test”).
A foreign corporation that does not satisfy either of these two tests
is treated as a qualified foreign corporation with respect to any dividend
paid by such corporation if the stock with respect to which such dividend
is paid is readily tradable on an established securities market in the United
States. Section 1(h)(11)(C)(ii). See Notice 2003-71, 2003-2 C.B. 922, for
the definition, for taxable years beginning on or after January 1, 2003, of
“readily tradable on an established securities market in the United
A qualified foreign corporation does not include any foreign corporation
that for the taxable year of the corporation in which the dividend was paid,
or the preceding taxable year, is a passive foreign investment company (as
defined in section 1297). Section 1(h)(11)(C)(iii). A dividend from a qualified
foreign corporation is also subject to the other limitations in section 1(h)(11).
For example, a shareholder receiving a dividend from a qualified foreign
corporation must satisfy the holding period requirements of section 1(h)(11)(B)(iii).
The appendix to this notice sets forth the current list of U.S. income
tax treaties that meet the requirements of section 1(h)(11)(C)(i)(II). Three
U.S. income tax treaties do not meet the requirements of section 1(h)(11)(C)(i)(II).
The tax treaties with Bermuda and the Netherlands Antilles are not comprehensive
income tax treaties within the meaning of section 1(h)(11). The U.S.-U.S.S.R.
income tax treaty, which was signed on June 20, 1973, and currently applies
to certain former Soviet Republics, does not include an information exchange
At the time Notice 2003-69 was published, the income tax treaty with
Barbados was determined not to be satisfactory for purposes of section 1(h)(11)
because of concern that the treaty may have operated to provide benefits that
were intended to mitigate or eliminate double taxation in cases where there
was no risk of double taxation. See, e.g.,
H.R. Rep. 108-126, 108th Cong., 1st Sess.,
at 42 (2003) (conference report on the 2003 Act). On July 14, 2004, the United
States and Barbados signed a Second Protocol to the U.S.-Barbados income tax
treaty (the “Second Protocol”), which entered into force on December
20, 2004. The Second Protocol amended the U.S.-Barbados income tax treaty
by substituting a new limitation on benefits article that reflected developments
in U.S. treaty policy and was designed to eliminate in particular the availability
of certain inappropriate benefits under the existing treaty. Following the
changes made by the Second Protocol, the income tax treaty with Barbados has
been determined to be satisfactory for purposes of section 1(h)(11).
The updated list in the appendix to this notice also contains two U.S.
income tax treaties that entered into force after the publication of Notice
2003-69: the U.S. income tax treaties with Sri Lanka (which entered into force
on July 12, 2004) and Bangladesh (which entered into force on August 7, 2006).
Treasury and the IRS intend to update this list, as appropriate. Situations
that may result in changes to the list include the entry into force of new
income tax treaties and the amendment or renegotiation of existing tax treaties.
Further, Treasury and the IRS continue to study the operation of each of
our income tax treaties, including the implications of any change in the domestic
laws of the treaty partner, to ensure that the treaty accomplishes its intended
objectives and continues to be satisfactory for purposes of this provision.
It is anticipated that any changes to the list of income tax treaties that
meet the requirements of section 1(h)(11)(C)(i)(II) will apply only to dividends
paid after the date of publication of the revised list.
Finally, in order to be treated as a qualified foreign corporation under
the treaty test, a foreign corporation must be eligible for benefits of one
of the U.S. income tax treaties listed in the Appendix. Accordingly, 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.
3. EFFECTIVE DATE
This notice is effective with respect to Bangladesh for dividends paid
on or after August 7, 2006. This notice is effective with respect to Barbados
for dividends paid on or after December 20, 2004. This notice is effective
with respect to Sri Lanka for dividends paid on or after July 12, 2004. This
notice is effective with respect to all other U.S. income tax treaties listed
in the Appendix for taxable years beginning after December 31, 2002.
4. EFFECT ON OTHER DOCUMENTS
Notice 2003-69 is amplified and superseded.
5. CONTACT INFORMATION
The principal author of this notice is Ana C. Guzman of the Office of
Associate Chief Counsel (International). For further information regarding
this notice, contact Ms. Guzman at (202) 622-3880 (not a toll-free call).