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jgordosea
jgordosea, Enrolled Agent
Category: Tax
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Experience:  I've prepared all types of taxes since 1987.
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I own a significant number of shares in a privately-held Singapore

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I own a significant number of shares in a privately-held Singapore company. The shares I own would be considered long term. Recently, the company issued dividends. Do I have to pay taxes on these dividends as if it were ordinary income? I've heard that because Singapore does not have a tax treaty in place with the US, dividends cannot be claimed as qualified. Is this true? As the company has a significant presence in the US (100% fully owned subsidiary that accounts for 60% of total revenues), does this affect the dividend status (being either qualified or ordinary)? Any links to IRS documentation or other reliable sources would be greatly appreciated.
Submitted: 5 years ago.
Category: Tax
Expert:  jgordosea replied 5 years ago.

Greetings,

 

The first issue to decide is if the Singapore company is a "controlled foreign corporation" (CFC) that is a foreign corporation in which US shareholders own more than 50 percent of the total value.

 

26 U.S.C. § 957(a) General rule

For purposes of this subpart, the term "controlled foreign corporation" means any foreign corporation if more than 50 percent of-- (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or

(2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation

 

A US shareholder is a US person who owns at least 10 percent of the voting power of stock entitled to vote. U.S. shareholders must generally include their pro rata share of subpart F income (dividends, interest, rents, and royalties) in their gross income, whether or not it is actually distributed. Actual CFC dividends are treated as qualified dividend income if the CFC is otherwise a qualified foreign corporation and other requirements are met (section 1(h)(11)). Distributions from a CFC of previously taxed income are excluded from gross income and are thus not treated as a dividend and not subject to US tax.

 

A U.S. person who owns more than 50% of a "controlled foreign corporation" (CFC) must file Form 5471 See also Instructions for Form 5471 The form and schedules are used to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations. A U.S. person must file Form 926 in the tax year there is a transfer property to a CFC as paid-in surplus or contributions to capital.

Form 8621 must be filed if the taxpayer is a shareholder of a CFC that also meets the definition of a passive foreign investment company.

 

From Instructions for Form 1099-DIV (2009) :

Qualified Dividends

Except as provided below, qualified dividends are dividends paid during the tax year from domestic corporations and qualified foreign corporations. For individuals, estates, and trusts, qualified dividends are taxed at a maximum rate of 15% (generally, the rate is zero for individuals whose other income is taxed at the 10% or 15% rate)

...

Qualified foreign corporation.

A foreign corporation is a qualified foreign corporation if it is:

  1. Incorporated in a possession of the United States or

  2. Eligible for benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program.

For a list of income tax treaties of the United States that (a) are comprehensive, (b) include an information exchange program, and (c) have been determined by the Treasury Department to be satisfactory for this purpose, see Notice 2006-101, 2006-47 I.R.B. 930, available at www.irs.gov/irb/2006-47_IRB/ar07.html

If the foreign corporation does not meet either 1 or 2 above, then it may be treated as a qualified foreign corporation for any dividend paid by the corporation if the stock associated with the dividend paid is readily tradable on an established securities market in the United States. See Notice 2003-71, 2003-43 I.R.B. 922, available at www.irs.gov/irb/2003-43_IRB/ar10.html, for more information on when a stock may be considered to be readily tradable. For additional requirements that must be met, see Notice 2006-3, 2006-3 I.R.B. 306, available at www.irs.gov/irb/2006-03_IRB/ar11.html.

 

 

I hope this helps for understanding what is a qualified foreign corporation for purposes of determining if a dividend may be a qualifying dividend and also makes you aware of the special rules for a controlled foreign corporation.

 

Best regards.

Customer: replied 5 years ago.
If the foreign (Singapore) corporation has a 100% owned US based subsidiary, would this be considered qualified then? The definition of the "qualified foreign corporation" is that it is incorporated in the US. In this case, the foreign corporation opened a US office to explicitly do business here. Is that qualified?
Expert:  jgordosea replied 5 years ago.

Hello again,

 

Probably not. By definition a subsidiary is a company that is controlled by the parent. Generally the subsidiary is not separately incorporated (but may be) in the United States. I see no reasonable support for an argument that the parent can be considered a qualifying foreign corporation based on the existence or attributes of the subsidiary.

 

Only if your ownership was in the subsidiary and the dividend was received from the subsidiary (and not the parent) would that seem to be relevant to determine the type of dividend paid to you.

 

I hope this helps to clarify even though it is likely not the answer you would like to hear.

jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3007
Experience: I've prepared all types of taxes since 1987.
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