SECTION 7. PASSIVE FOREIGN

INVESTMENT COMPANIES

.01 In General

Section 1(h)(11)(C)(iii) of the Code excludes PFICs from the definition of qualified foreign corporation. As a result, a dividend (including an excess distribution) from a foreign corporation that is a PFIC or that is not a PFIC in the current taxable year but was a PFIC in the preceding taxable year is not qualified dividend income.

Similarly, amounts included in a shareholder’s gross income under sections 1293(a) (in the case of a shareholder that has made a QEF election) or 1296 (in the case of a shareholder that has made a mark to market election) are not qualified dividend income.

.02 Determination of PFIC Status

As noted above in Section 3.02(4), some of the rules for determining whether a foreign corporation is a PFIC operate on a shareholder-by-shareholder basis. Therefore, a foreign corporation may be treated as a PFIC with respect to some shareholders but not others. Thus, for purposes of section 1(h)(11), the result of an analysis of whether a foreign corporation is a PFIC, and therefore whether dividends from that corporation are for that reason excluded from qualified dividend income, may be different for shareholders of the same foreign corporation.

A determination of whether a foreign corporation was a PFIC in the previous taxable year also should be made on a shareholder-by-shareholder basis if the shareholder of the foreign corporation was a shareholder in the previous taxable year. For example, a foreign corporation that was a PFIC under the income test or the asset test of section 1297(a) of the Code for one year of a shareholder’s holding period under certain circumstances may be a PFIC with respect to that shareholder even though it may not meet the income or asset tests in subsequent years and notwithstanding that the foreign corporation may not be a PFIC with respect to other shareholders. Section 1298(b)(1). To the extent a foreign corporation is a PFIC with respect to a shareholder, dividends received by that shareholder are not qualified dividend income.

November 1, 2004 727 2004–44 I.R.B.

VI. CONTACT INFORMATION

The principal author of this notice is Alexandra K. Helou of the Office of Associate Chief Counsel (International). However, other personnel from the Service and the Treasury participated in its development. For further information regarding this notice, contact Phyllis Marcus at (202) 622–3840 (not a toll-free call).

effective for amounts included in income on or after October 8, 2004. Until such regulations are issued, taxpayers may rely on this notice.