Qualified Dividends and Foreign Corporations

Sunday, April 8, 2007 at 1:41PM
Joey Brannon in Tax

For the last several years shareholders of corporations have enjoyed reduced tax rates on dividends. Since May of 2003 dividends have been taxed at a maximum rate of 15% where they were formerly taxed at rates up to 38%. However, dividends must be 'qualified' in order to get the more favorable tax treatment. One area that often causes problems involves closely held foreign corporations owned by US residents. "Qualified" dividend status may not be conferred on distributions from these companies to their owners. Among the criteria for qualified status is the requirement that the dividends be paid from a US company or a qualified foreign corporation. A qualified foreign corporation is one that meets any of the following tests (from IRS Pub 550):

1. Incorporated in the US


2. Corporation is eligible for benefits of comprehensive income tax treaty


3. Corporation's stock is readily tradable on an established securities market in the US

The second qualification is the one most often used in the case of closely held foreign corporations. However, there are many countries with which the US does not have an income tax treaty satisfying these requirements. For instance, there is no South American country with an eligible treaty. Brazil is currently a very attractive market for agricultural expansion but investors should be aware of the fact that their cash distributions will in most cases be subject to ordinary income tax rates.

Article originally appeared on Axiom CPA, P.A. (http://www.axiomcpa.com/).