SECTION 3. ANALYSIS

This Section discusses the information reporting determinations with respect to each of the tests relevant to whether a distribution with respect to a security issued by a foreign corporation is a qualified dividend.

.01 Equity Test In order to be a qualified dividend, a distribution must be made with respect to equity rather than indebtedness, as determined under U.S. federal income tax principles. The characterization of an instrument for U.S. federal income tax purposes depends on the terms of the instrument and all surrounding facts and circumstances. See, e.g., Notice 94–47, 1994–1 C.B. 357.

Common or ordinary shares generally are treated as equity for U.S. federal income tax purposes. For a security issued by a foreign corporation other than a common or an ordinary share (such as a preferred share), a person required to make a return under section 6042 may not be aware of all the information relevant to determining whether a particular security is debt or equity, although such a person does have access to information contained in public filings with the SEC. A foreign corporation generally will have all the information relevant to applying the equity test.

For 2003 information reporting, a person required to make a return under section 6042 for a distribution with respect to a security issued by a foreign corporation shall treat the security as satisfying the equity test if the security is a common or an ordinary share. In addition, if the security is not a common or an ordinary share, such person shall treat the security as satisfying the equity test if the foreign corporation has a public statement filed with the SEC stating that the security will be, should be, or more likely than not will be properly classified as equity rather than as debt for U.S. federal income tax purposes.

5 See Section 1.6042–3 of the Income Tax Regulations for guidance on when dividends are subject to information reporting.

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The 2003 Act provides that a qualified foreign corporation does not include any foreign corporation that is a FPHC, FIC, or PFIC for the taxable year in which the dividend was paid or the preceding year. A foreign corporation generally will have all of the information relevant to making these determinations. Many foreign corporations that are publicly traded in the United States currently make these determinations each year and provide discussions regarding one or more of these determinations in their annual filings with the SEC, such as Form 20–F. However, not all foreign companies provide such a discussion in their U.S. public filings. Additionally, many foreign companies that are not publicly traded in the United States do not include discussions regarding these determinations in their public filings in their home jurisdiction.

As discussed below, Treasury and the IRS intend to develop a certification procedure for 2004 and future information reporting under which a foreign corporation may certify that it satisfies the foreign investment company exclusion test. For 2003 information reporting, Treasury and the IRS believe it is appropriate to use a simplified procedure that is based on the knowledge of persons required to make a return under section 6042. Accordingly, a person required to make a return under section 6042 for 2003 shall treat a foreign corporation as satisfying the foreign investment company exclusion test unless the person knows or has reason to know that the corporation is or expects to be a FPHC, FIC, or PFIC. For this purpose, a person would have the requisite reason to know if a corporation has stated in its most recent annual public filing with the SEC that it is or expects to be a FPHC, FIC, or PFIC. ⁶

.05 Holding Period Test The 2003 Act provides that a recipient of a dividend must satisfy certain holding period requirements in order for the dividend to be considered a qualified dividend. The instructions to Form 1099–DIV direct a person required to file Form 1099–DIV to report in Box 1b as qualified dividends any dividends for which it is impractical to determine whether the recipient has met the holding period requirements for the stock with respect to which the dividend is paid. Accordingly, if a person required to

(b) Possessions Test . The 2003 Act provides that, in order to satisfy the possessions test, a corporation must be incorporated in a possession of the United States. For 2003 and future years, a person required to make a return under section 6042 shall treat a corporation incorporated in a possession of the United States as satisfying the possessions test.

(c) Treaty Test . The 2003 Act provides that, in order to satisfy the treaty test, a corporation must be eligible for benefits of a comprehensive income tax treaty with the United States which the Secretary determines is satisfactory for purposes of section 1(h)(11) and which includes an exchange of information program. Notice 2003–69 contains the current list of treaties that meet the requirements of the 2003 Act.

Treaties generally confer benefits only on “residents” of the countries that are parties to the treaty and frequently include a “limitation on benefits” provision designed to ensure that treaty benefits are not available to persons engaged in “treaty shopping.” For example, the mere fact that a corporation is organized in a country may not be sufficient for the corporation to qualify for benefits under the relevant treaty. The terms of each treaty, including any limitation on benefits provision, reflect the particular circumstances of the relevant treaty partner relative to the United States. The determination as to whether a particular foreign corporation would be eligible for benefits under a particular treaty can be a fact-intensive determination. A foreign corporation generally will have all the information relevant to applying the treaty test. For example, a foreign corporation that receives U.S. source income eligible for a reduced rate of withholding under a treaty generally must complete a Form W–8BEN certifying under penalties of perjury that, among other items, it is a resident of the relevant country within the meaning of the relevant treaty and satisfies the limitation on benefits provision, if any, provided in that treaty. As discussed in Section 5 below, for 2004 and future information reporting Treasury and the IRS intend to develop a certification procedure under which a foreign corporation may certify that it meets the treaty test. For corporations that complete a Form W–8BEN for

other purposes, it is expected that filing a copy of this form with the IRS could be used as a means of meeting the certification requirement with respect to the treaty test, depending on the circumstances.

Treasury and the IRS recognize that the fact-intensive nature of the determination whether a foreign corporation is eligible for benefits under a treaty, coupled with the need for persons required to make information returns to begin work now on processing those returns and related payee statements, makes it appropriate to use a simplified procedure for 2003 information reporting.

For 2003 information reporting, a person required to make a return under section 6042 shall treat a foreign corporation as satisfying the treaty test provided that (i) the foreign corporation is organized in a country whose income tax treaty with the United States is listed in Notice 2003–69, and (ii) if the relevant treaty contains a limitation on benefits provision, the corporation’s common or ordinary stock is listed on an exchange covered by the public trading test in that limitation on benefits provision. However, a person required to make such a return shall not treat a foreign corporation as satisfying the treaty test if such person knows or has reason to know that the corporation is not eligible for benefits under the relevant treaty. For this purpose, a person will be considered to have reason to know the corporation is not eligible for treaty benefits if the corporation has so stated in its most recent SEC annual filing (if any) for the security ( e.g., Form 20–F).

For example, assume that a foreign corporation is incorporated in Austria and that its common stock is listed on the Vienna exchange. The U.S.-Austria income tax treaty is listed in Notice 2003–69, and the Vienna exchange is covered by the public trading test in the limitation on benefits provision of the U.S.-Austria income tax treaty. A person required to make a return under section 6042 would treat the Austrian corporation as satisfying the treaty test unless the person knew or had reason to know that the corporation was not eligible for benefits of the U.S.-Austria income tax treaty.

.04 Foreign Investment Company Ex- clusion Test

6 A U.S. person owning a share in a foreign corporation may be subject to a number of separate reporting rules. See e.g., Form 8621 (annual return for shareholders owning stock in a PFIC).

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a. the security is considered “readily tradable on an established securities market in the United States”;

b. the foreign corporation is organized in a possession of the United States; or

c. the foreign corporation is organized in a country whose income tax treaty with the United States is listed in Notice 2003–69, and if the relevant treaty contains a limitation on benefits provision, the corporation’s common or ordinary stock is listed on an exchange covered by that limitation on benefits provision’s public trading test, unless the person required to file an information return knows or has reason to know that the corporation is not eligible for benefits under that treaty; and

3. the person required to file Form 1099–DIV does not know or have reason to know that the foreign corporation is or expects to be, in the taxable year of the corporation in which the dividend was paid or was, in the preceding taxable year, a FPHC, FIC, or PFIC; and

4. the person required to make a return under section 6042 determines that the owner of the distribution has satisfied the holding period test or it is impractical for such person to make such determination.

The IRS will exercise its authority under section 6724(a) of the Code to waive penalties under sections 6721 and 6722 with respect to reporting of calendar year 2003 payments if persons required to file Form 1099–DIV make a good faith effort to report payments consistent with the above rules. A person required to make a return under section 6042 may report a distribution in Box 1b as a qualified dividend even if the distribution does not satisfy the simplified information reporting procedures for 2003, subject to the applicable penalty provisions.

.02 Recipients of Form 1099–DIV for 2003 For taxable years beginning in 2003, a recipient of Form 1099–DIV may treat amounts reported in Box 1b as qualified dividends, unless and to the extent the recipient knows or has reason to know that such amounts are not qualified dividends.