SECTION 4. CONTROLLED FOREIGN

CORPORATIONS

This section provides guidance with respect to distributions, inclusions, and other amounts received by individual shareholders from a CFC that is not also an FPHC, a FIC, or a PFIC (and that was not an FPHC, a FIC, or a PFIC in the preceding taxable year). The treatment of distributions, inclusions, and other amounts received by individual shareholders of a CFC that is also an FPHC, a FIC, or a PFIC is addressed in sections 5, 6, and 7 of this notice, respectively.

Individual United States shareholders of CFCs may have amounts included in income under section 951(a)(1) of the Code, distributions of amounts previously taxed under section 951(a)(1), or distributions of amounts that have not been previously taxed under section 951(a)(1). The tax treatment of these amounts in the context of section 1(h)(11) is discussed below.

.01 Distributions of Amounts Not Previously Taxed

Section 1(h)(11) of the Code does not exclude CFCs from the definition of “qualified foreign corporations.” Thus, actual dividends from a CFC’s non-previously taxed earnings and profits to an individual shareholder are qualified dividend income provided that the CFC is otherwise a qualified foreign corporation under section 1(h)(11)(C) and the other requirements of section 1(h)(11) are met. Similarly, amounts treated as dividends under section 1248(a) are qualified dividend income provided that the CFC is otherwise a qualified foreign corporation under section 1(h)(11)(C) and the other requirements of section 1(h)(11) are met. ⁴ See section 1248(a) (stating gain recognized on the sale or exchange of stock in certain foreign corporations shall be included in the gross income of a shareholder as a divi

3 Section 1298(b)(1) also may not apply to a shareholder that has obtained a new holding period under section 1.1296–1(f) of the regulations by reason of a mark-to-market election.

4 Amounts treated as dividends under section 1248(a) in the case of gain with respect to stock of a foreign corporation that was a CFC during the 5-year period prior to the disposition also may be qualified dividend income provided that the foreign corporation is otherwise a qualified foreign corporation under section 1(h)(11)(C) and the other requirements of section 1(h)(11) are met. Future guidance may address the treatment of section 304 amounts and section 306(a)(2) amounts under section 1(h)(11).

5 Amounts treated as dividends under section 1.367(b)–2(e)(2) of the regulations with respect to foreign corporations that are not CFCs also may be qualified dividend income provided that the foreign corporation is otherwise a qualified foreign corporation under section 1(h)(11)(C) and the other requirements of section 1(h)(11) are met. Section 1.367(b)–3(c)(3).

6 It should be noted that, while section 951(a) was not modified by the 2003 Act, section 306(a)(1)(D) was modified to provide that, for purposes of section 1(h)(11), amounts treated as ordinary income under section 306 shall be treated as a dividend received from the corporation.

2004–44 I.R.B. 726 November 1, 2004

.03 PFICs that are also CFCs

A foreign corporation may be both a PFIC and a CFC. Except where section 1297(e) of the Code applies to certain shareholders as described below, in cases where a foreign corporation is both a PFIC and a CFC an amount received by a shareholder from such a corporation is not qualified dividend income.

Where a foreign corporation is a CFC, section 1297(e)(1) of the Code provides that the foreign corporation generally is not treated as a PFIC with respect to a shareholder during the qualified portion of the shareholder’s holding period in the stock of the foreign corporation even if the corporation meets the income test or the asset test. The qualified portion generally is the portion of the shareholder’s holding period that is after December 31, 1997, and during which the shareholder is a United States shareholder and the foreign corporation is a CFC. This overlap elimination rule does not apply if the foreign corporation otherwise is treated as a PFIC under section 1298(b)(1) because there is a portion of the shareholder’s holding period prior to the application of this rule when the foreign corporation was a PFIC. H.R. Rep. No. 105–148, 105 ^th Cong., 1 ^st Sess., at 534 (1997).

In cases where a foreign corporation would qualify as a PFIC with respect to a shareholder but for the application of section 1297(e) of the Code, for purposes of section 1(h)(11), distributions, inclusions, or amounts received by, or included in the income of, that shareholder from that foreign corporation are subject to the same analysis as amounts from foreign corporations that are CFCs and are not PFICs. Thus, in accordance with the guidance provided for CFCs in Section 4 above, distributions of non-previously taxed earnings and profits received by an individual from a CFC that would be treated as a PFIC with respect to such individual but for the rule of section 1297(e) are qualified dividend income provided that the CFC is otherwise a qualified foreign corporation under section 1(h)(11)(C) and the other requirements of section 1(h)(11) are met.