II

104TH CONGRESS

2D SESSION S. 1942

To amend the Internal Revenue Code of 1986 to provide tax treatment

for foreign investment through a United States regulated investment

company comparable to the tax treatment for direct foreign investment

and investment through a foreign mutual fund.

IN THE SENATE OF THE UNITED STATES

JULY 10, 1996

Mr. BAUCUS (for himself, Mr. GORTON, and Mrs. MURRAY) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

tax treatment for foreign investment through a United

States regulated investment company comparable to the

tax treatment for direct foreign investment and investment through a foreign mutual fund.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 (a) SHORT TITLE.—This Act may be cited as the

5 ‘‘Investment Competitiveness Act of 1996’’.

6 (b) AMENDMENT OF 1986 CODE.—Whenever in this

7 Act an amendment or repeal is expressed in terms of an
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1 amendment to, or repeal of, a section or other provision,

2 the reference shall be considered to be made to a section

3 or other provision of the Internal Revenue Code of 1986.

4 SEC. 2. TREATMENT OF CERTAIN DIVIDENDS OF REGU5 LATED INVESTMENT COMPANIES.

6 (a) TREATMENT OF CERTAIN DIVIDENDS.—

7 (1) NONRESIDENT ALIEN INDIVIDUALS.—Sec8 tion 871 (relating to tax on nonresident alien indi9 viduals) is amended by redesignating subsection (k)

10 as subsection (l) and by inserting after subsection (j)

11 the following new subsection:

12 ‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG13 ULATED INVESTMENT COMPANIES.—

14 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

15 ‘‘(A) IN GENERAL.—Except as provided in

16 subparagraph (B), no tax shall be imposed

17 under paragraph (1)(A) of subsection (a) on

18 any interest-related dividend received from a

19 regulated investment company.

20 ‘‘(B) EXCEPTIONS.—Subparagraph (A)

21 shall not apply—

22 ‘‘(i) to any interest-related dividend

23 received from a regulated investment com24 pany by a person to the extent such divi25 dend is attributable to interest (other than
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1 interest described in subparagraph (E) (i)

2 or (iii)) received by such company on in3 debtedness issued by such person or by any

4 corporation or partnership with respect to

5 which such person is a 10-percent share6 holder,

7 ‘‘(ii) to any interest-related dividend

8 with respect to stock of a regulated invest9 ment company unless the person who

10 would otherwise be required to deduct and

11 withhold tax from such dividend under

12 chapter 3 receives a statement (which

13 meets requirements similar to the require14 ments of subsection (h)(5)) that the bene15 ficial owner of such stock is not a United

16 States person, and

17 ‘‘(iii) to any interest-related dividend

18 paid to any person within a foreign coun19 try (or any interest-related dividend pay20 ment addressed to, or for the account of,

21 persons within such foreign country) dur22 ing any period described in subsection

23 (h)(6) with respect to such country.

24 Clause (iii) shall not apply to any dividend with

25 respect to any stock which was acquired on or
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1 before the date of the publication of the Sec2 retary’s determination under subsection (h)(6).

3 ‘‘(C) INTEREST-RELATED DIVIDEND.—For

4 purposes of this paragraph, an interest-related

5 dividend is any dividend (or part thereof) which

6 is designated by the regulated investment com7 pany as an interest-related dividend in a writ8 ten notice mailed to its shareholders not later

9 than 60 days after the close of its taxable year.

10 If the aggregate amount so designated with re11 spect to a taxable year of the company (includ12 ing amounts so designated with respect to divi13 dends paid after the close of the taxable year

14 described in section 855) is greater than the

15 qualified net interest income of the company for

16 such taxable year, the portion of each distribu17 tion which shall be an interest-related dividend

18 shall be only that portion of the amounts so

19 designated which such qualified net interest in20 come bears to the aggregate amount so des21 ignated.

22 ‘‘(D) QUALIFIED NET INTEREST IN23 COME.—For purposes of subparagraph (C), the

24 term ‘qualified net interest income’ means the

25 qualified interest income of the regulated in-
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1 vestment company reduced by the deductions

2 properly allocable to such income.

3 ‘‘(E) QUALIFIED INTEREST INCOME.—For

4 purposes of subparagraph (D), the term ‘quali5 fied interest income’ means the sum of the fol6 lowing amounts derived by the regulated invest7 ment company from sources within the United

8 States:

9 ‘‘(i) Any amount includible in gross

10 income as original issue discount (within

11 the meaning of section 1273) on an obliga12 tion payable 183 days or less from the date

13 of original issue (without regard to the pe14 riod held by the company).

15 ‘‘(ii) Any interest includible in gross

16 income (including amounts recognized as

17 ordinary income in respect of original issue

18 discount or market discount or acquisition

19 discount under part V of subchapter P and

20 such other amounts as regulations may

21 provide) on an obligation which is in reg22 istered form; except that this clause shall

23 not apply to—

24 ‘‘(I) any interest on an obligation

25 issued by a corporation or partnership
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1 if the regulated investment company

2 is a 10-percent shareholder in such

3 corporation or partnership, and

4 ‘‘(II) any interest which is treat5 ed as not being portfolio interest

6 under the rules of subsection (h)(4).

7 ‘‘(iii) Any interest referred to in sub8 section (i)(2)(A) (without regard to the

9 trade or business of the regulated invest10 ment company).

11 ‘‘(F) 10-PERCENT SHAREHOLDER.—For

12 purposes of this paragraph, the term ‘10-per13 cent shareholder’ has the meaning given to such

14 term by subsection (h)(3)(B).

15 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

16 ‘‘(A) IN GENERAL.—Except as provided in

17 subparagraph (B), no tax shall be imposed

18 under paragraph (1)(A) of subsection (a) on

19 any short-term capital gain dividend received

20 from a regulated investment company.

21 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

22 UNDER SUBSECTION (a)(2).—Subparagraph (A)

23 shall not apply in the case of any nonresident

24 alien individual subject to tax under subsection

25 (a)(2).
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1 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI2 DEND.—For purposes of this paragraph, a

3 short-term capital gain dividend is any dividend

4 (or part thereof) which is designated by the reg5 ulated investment company as a short-term cap6 ital gain dividend in a written notice mailed to

7 its shareholders not later than 60 days after the

8 close of its taxable year. If the aggregate

9 amount so designated with respect to a taxable

10 year of the company (including amounts so des11 ignated with respect to dividends paid after the

12 close of the taxable year described in section

13 855) is greater than the qualified short-term

14 gain of the company for such taxable year, the

15 portion of each distribution which shall be a

16 short-term capital gain dividend shall be only

17 that portion of the amounts so designated

18 which such qualified short-term gain bears to

19 the aggregate amount so designated.

20 ‘‘(D) QUALIFIED SHORT-TERM GAIN.—For

21 purposes of subparagraph (C), the term ‘quali22 fied short-term gain’ means the excess of the

23 net short-term capital gain of the regulated in24 vestment company for the taxable year over the

25 net long-term capital loss (if any) of such com-
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1 pany for such taxable year. For purposes of this

2 subparagraph, the excess of the net short-term

3 capital gain for a taxable year over the net

4 long-term capital loss for a taxable year (to

5 which an election under section 4982(e)(4) does

6 not apply) shall be determined without regard

7 to any net capital loss or net short-term capital

8 loss attributable to transactions after October

9 31 of such year, and any such net capital loss

10 or net short-term capital loss shall be treated as

11 arising on the 1st day of the next taxable year.

12 To the extent provided in regulations, the pre13 ceding sentence shall apply also for purposes of

14 computing the taxable income of the regulated

15 investment company.’’.

16 (2) FOREIGN CORPORATIONS.—Section 881 is

17 amended by redesignating subsection (e) as sub18 section (f) and by inserting after subsection (d) the

19 following new subsection:

20 ‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS

21 OF REGULATED INVESTMENT COMPANIES.—

22 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

23 ‘‘(A) IN GENERAL.—Except as provided in

24 subparagraph (B), no tax shall be imposed

25 under paragraph (1) of subsection (a) on any
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1 interest-related dividend (as defined in section

2 871(k)(1)) received from a regulated investment

3 company.

4 ‘‘(B) EXCEPTION.—Subparagraph (A)

5 shall not apply—

6 ‘‘(i) to any dividend referred to in sec7 tion 871(k)(1)(B), and

8 ‘‘(ii) to any interest-related dividend

9 received by a controlled foreign corporation

10 (within the meaning of section 957(a)) to

11 the extent such dividend is attributable to

12 interest received by the regulated invest13 ment company from a person who is a re14 lated person (within the meaning of section

15 864(d)(4)) with respect to such controlled

16 foreign corporation.

17 ‘‘(C) TREATMENT OF DIVIDENDS RE18 CEIVED BY CONTROLLED FOREIGN CORPORA19 TIONS.—The rules of subsection (c)(5)(A) shall

20 apply to any interest-related dividend received

21 by a controlled foreign corporation (within the

22 meaning of section 957(a)) to the extent such

23 dividend is attributable to interest received by

24 the regulated investment company which is de25 scribed in clause (ii) of section 871(k)(1)(E)
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1 (and not described in clause (i) or (iii) of such

2 section).

3 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

4 No tax shall be imposed under paragraph (1) of sub5 section (a) on any short-term capital gain dividend

6 (as defined in section 871(k)(2)) received from a

7 regulated investment company.’’.

8 (3) WITHHOLDING TAXES.—

9 (A) Subsection (c) of section 1441 is

10 amended by adding at the end thereof the fol11 lowing new paragraph:

12 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

13 REGULATED INVESTMENT COMPANIES.—

14 ‘‘(A) IN GENERAL.—No tax shall be re15 quired to be deducted and withheld under sub16 section (a) from any amount exempt from the

17 tax imposed by section 871(a)(1)(A) by reason

18 of section 871(k).

19 ‘‘(B) SPECIAL RULE.—For purposes of

20 subparagraph (A), clause (i) of section

21 871(k)(1)(B) shall not apply to any dividend

22 unless the regulated investment company knows

23 that such dividend is a dividend referred to in

24 such clause. A similar rule shall apply with re-
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1 spect to the exception contained in section

2 871(k)(2)(B).’’.

3 (B) Subsection (a) of section 1442 is

4 amended—

5 (i) by striking ‘‘and the reference in

6 section 1441(c)(10)’’ and inserting ‘‘the

7 reference in section 1441(c)(10)’’, and

8 (ii) by inserting before the period at

9 the end thereof the following: ‘‘, and the

10 references in section 1441(c)(12) to sec11 tions 871(a) and 871(k) shall be treated as

12 referring to sections 881(a) and 881(e)

13 (except that for purposes of applying sub14 paragraph (A) of section 1441(c)(12), as

15 so modified, clause (ii) of section

16 881(e)(1)(B) shall not apply to any divi17 dend unless the regulated investment com18 pany knows that such dividend is a divi19 dend referred to in such clause)’’.

20 (b) ESTATE TAX TREATMENT OF INTEREST IN CER21 TAIN REGULATED INVESTMENT COMPANIES.—Section

22 2105 (relating to property without the United States for

23 estate tax purposes) is amended by adding at the end

24 thereof the following new subsection:

25 ‘‘(d) STOCK IN A RIC.—
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1 ‘‘(1) IN GENERAL.—For purposes of this sub2 chapter, stock in a regulated investment company

3 (as defined in section 851) owned by a nonresident

4 not a citizen of the United States shall not be

5 deemed property within the United States in the

6 proportion that, at the end of the quarter of such in7 vestment company’s taxable year immediately pre8 ceding a decedent’s date of death (or at such other

9 time as the Secretary may designate in regulations),

10 the assets of the investment company that were

11 qualifying assets with respect to the decedent bore

12 to the total assets of the investment company.

13 ‘‘(2) QUALIFYING ASSETS.—For purposes of

14 this subsection, qualifying assets with respect to a

15 decedent are assets that, if owned directly by the de16 cedent, would have been—

17 ‘‘(A) amounts, deposits, or debt obligations

18 described in subsection (b) of this section,

19 ‘‘(B) debt obligations described in the last

20 sentence of section 2104(c), or

21 ‘‘(C) other property not within the United

22 States.’’.

23 (c) TREATMENT OF REGULATED INVESTMENT COM24 PANIES UNDER SECTION 897.—
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1 (1) Paragraph (1) of section 897(h) is amended

2 by striking ‘‘REIT’’ each place it appears and in3 serting ‘‘qualified investment entity’’.

4 (2) Paragraphs (2) and (3) of section 897(h)

5 are amended to read as follows:

6 ‘‘(2) SALE OF STOCK IN DOMESTICALLY-CON7 TROLLED ENTITY NOT TAXED.—The term ‘United

8 States real property interest’ does not include any

9 interest in a domestically-controlled qualified invest10 ment entity.

11 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY-CON12 TROLLED QUALIFIED INVESTMENT ENTITIES.—In

13 the case of a domestically-controlled qualified invest14 ment entity, rules similar to the rules of subsection

15 (d) shall apply to the foreign ownership percentage

16 of any gain.’’.

17 (3) Subparagraphs (A) and (B) of section

18 897(h)(4) are amended to read as follows:

19 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

20 The term ‘qualified investment entity’ means

21 any real estate investment trust and any regu22 lated investment company.

23 ‘‘(B) DOMESTICALLY-CONTROLLED.—The

24 term ‘domestically-controlled qualified invest25 ment entity’ means any qualified investment en-
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1 tity in which at all times during the testing pe2 riod less than 50 percent in value of the stock

3 was held directly or indirectly by foreign per4 sons.’’.

5 (4) Subparagraphs (C) and (D) of section

6 897(h)(4) are each amended by striking ‘‘REIT’’

7 and inserting ‘‘qualified investment entity’’.

8 (5) The subsection heading for subsection (h) of

9 section 897 is amended by striking ‘‘REITS’’ and

10 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’.

11 (d) EFFECTIVE DATE.—

12 (1) IN GENERAL.—Except as otherwise pro13 vided in this subsection, the amendments made by

14 this section shall apply to dividends with respect to

15 taxable years of regulated investment companies be16 ginning after the date of the enactment of this Act.

17 (2) ESTATE TAX TREATMENT.—The amend18 ment made by subsection (b) shall apply to estates

19 of decedents dying after the date of the enactment

20 of this Act.

21 (3) CERTAIN OTHER PROVISIONS.—The amend22 ments made by subsection (c) (other than paragraph

23 (1) thereof) shall take effect on the date of the en24 actment of this Act.

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