SECTION 2. OVERVIEW

The 2003 Act provides that qualified dividend income received by an individual shareholder is subject to tax at reduced rates. This notice provides guidance regarding the extent to which distributions, inclusions, and other amounts received by, or included in the income of, individual shareholders as ordinary income from foreign corporations subject to certain anti-deferral regimes may be treated as qualified dividend income for purposes of section 1(h)(11) of the Code. Section 3 of this notice describes the statutory rules for determining whether income is

qualified dividend income and describes in general the anti-deferral regimes applicable to controlled foreign corporations (as defined in sections 957(a) and (b) and 953(c)(1)(B)) (CFCs), foreign personal holding companies (as defined in section 552(a)) (FPHCs), foreign investment companies (as defined in section 1246(b)) (FICs), and passive foreign investment companies (as defined in section 1297(a)) (PFICs). These rules are relevant principally because section 1(h)(11)(C)(iii) provides that dividends from a foreign corporation which for the taxable year of the corporation in which the dividend is paid, or the preceding taxable year, is an FPHC, a FIC, or a PFIC, are not qualified dividend income. Section 4 of this notice provides guidance with respect to distributions, inclusions, and other amounts from a CFC that is not also an FPHC, a FIC, or a PFIC. Section 5 of this notice provides guidance with respect to FPHCs, including FPHCs that are also CFCs. Section 6 of this notice provides guidance with respect to FICs, including FICs that are also CFCs. Section 7 of this notice provides guidance with respect to PFICs, including PFICs that are also CFCs.

This notice provides that distributions of non-previously taxed earnings and profits from a CFC to an individual are qualified dividend income, and therefore are eligible for the reduced rates of tax applicable to certain capital gains under section 1(h)(1) of the Code, provided that the CFC is otherwise a qualified foreign corporation. This notice also provides that section 951(a)(1) inclusions from a CFC and deemed or actual distributions from an FPHC, a FIC or a PFIC are not qualified dividend income under section 1(h)(11)(B)(i)(II) and therefore are not eligible for the reduced rates of tax applicable to certain capital gains under section 1(h)(1). In addition, this notice provides that, for purposes of section 1(h)(11), the determination of whether a foreign corporation is a PFIC is made on a shareholder-by-shareholder basis. Accordingly, distributions of non-previously taxed earnings and profits received by an individual

from a CFC that would be a PFIC with respect to that individual but for the application of section 1297(e) are qualified dividend income if the CFC is otherwise a qualified foreign corporation.