I

107TH CONGRESS

1ST SESSION H. R. 1267

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 HOUSE OF REPRESENTATIVES

MARCH 28, 2001

Mr. CRANE (for himself, Ms. DUNN, Mr. SMITH of Washington, and Mr.

HASTINGS of Washington) introduced the following bill; which was referred to the Committee on Ways and Means

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’’.

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

2 (E)(i)(I) or (III) or (E)(ii)) received by

3 such company on indebtedness issued by

4 such person or by any corporation or part5 nership with respect to which such person

6 is a 10-percent shareholder,

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—

6 ‘‘(i) the following amounts derived by

7 the regulated investment company from

8 sources within the United States—

9 ‘‘(I) any amount includible in

10 gross income as original issue dis11 count (within the meaning of section

12 1273) on an obligation payable 183

13 days or less from the date of original

14 issue (without regard to the period

15 held by the company);

16 ‘‘(II) any interest includible in

17 gross income (including amounts rec18 ognized as ordinary income in respect

19 of original issue discount or market

20 discount or acquisition discount under

21 part V of subchapter P and such

22 other amounts as regulations may

23 provide) on an obligation which is in

24 registered form; except that this

25 clause shall not apply to any interest
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1 on an obligation issued by a corpora2 tion or partnership if the regulated in3 vestment company is a 10-percent

4 shareholder in such corporation or

5 partnership, and to any interest which

6 is treated as not being portfolio inter7 est under the rules of subsection

8 (h)(4);

9 ‘‘(III) any interest referred to in

10 subsection (i)(2)(A) (without regard

11 to the trade or business of the regu12 lated investment company); and

13 ‘‘(IV) any interest-related divi14 dend includible in gross income with

15 respect to stock of another regulated

16 investment company; and

17 ‘‘(ii) any interest derived by the regu18 lated investment company from sources

19 outside the United States other than inter20 est that is subject to a tax imposed by a

21 foreign jurisdiction if the amount of such

22 tax is reduced (or eliminated) by a treaty

23 with the United States.

24 ‘‘(F) 10-PERCENT SHAREHOLDER.—For

25 purposes of this paragraph, the term ‘10-per-
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1 cent shareholder’ has the meaning given to such

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

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

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

5 subparagraph (B), no tax shall be imposed

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

7 any short-term capital gain dividend received

8 from a regulated investment company.

9 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

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

11 shall not apply in the case of any nonresident

12 alien individual subject to tax under subsection

13 (a)(2).

14 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI15 DEND.—For purposes of this paragraph, a

16 short-term capital gain dividend is any dividend

17 (or part thereof) which is designated by the reg18 ulated investment company as a short-term cap19 ital gain dividend in a written notice mailed to

20 its shareholders not later than 60 days after the

21 close of its taxable year. If the aggregate

22 amount so designated with respect to a taxable

23 year of the company (including amounts so des24 ignated with respect to dividends paid after the

25 close of the taxable year described in section
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1 855) is greater than the qualified short-term

2 gain of the company for such taxable year, the

3 portion of each distribution which shall be a

4 short-term capital gain dividend shall be only

5 that portion of the amounts so designated

6 which such qualified short-term gain bears to

7 the aggregate amount so designated.

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

9 purposes of subparagraph (C), the term ‘quali10 fied short-term gain’ means the excess of the

11 net short-term capital gain of the regulated in12 vestment company for the taxable year over the

13 net long-term capital loss (if any) of such com14 pany for such taxable year. For purposes of this

15 subparagraph—

16 ‘‘(i) the net short-term capital gain of

17 the regulated investment company shall be

18 computed by treating any short-term cap19 ital gain dividend includible in gross in20 come with respect to the stock of another

21 regulated investment company as a short22 term capital gain, and

23 ‘‘(ii) the excess of the net short-term

24 capital gain for a taxable year over the net

25 long-term capital loss for a taxable year (to
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1 which an election under section 4982(e)(4)

2 does not apply) shall be determined with3 out regard to any net capital loss or net

4 short-term capital loss attributable to

5 transactions after October 31 of such year,

6 and any such net capital loss or net short7 term capital loss shall be treated as arising

8 on the 1st day of the next taxable year.

9 To the extent provided in regulations, clause

10 (ii) shall apply also for purposes of computing

11 the taxable income of the regulated investment

12 company.’’.

13 (2) FOREIGN CORPORATIONS.—Section 881 is

14 amended by redesignating subsection (e) as sub15 section (f) and by inserting after subsection (d) the

16 following new subsection:

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

18 OF REGULATED INVESTMENT COMPANIES.—

19 ‘‘(1) INTEREST-RELATED DIVIDENDS.—

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

21 subparagraph (B), no tax shall be imposed

22 under paragraph (1) of subsection (a) on any

23 interest-related dividend (as defined in section

24 871(k)(1)) received from a regulated investment

25 company.
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1 ‘‘(B) EXCEPTION.—Subparagraph (A)

2 shall not apply—

3 ‘‘(i) to any dividend referred to in sec4 tion 871(k)(1)(B), and

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

6 received by a controlled foreign corporation

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

8 the extent such dividend is attributable to

9 interest received by the regulated invest10 ment company from a person who is a re11 lated person (within the meaning of section

12 864(d)(4)) with respect to such controlled

13 foreign corporation.

14 ‘‘(C) TREATMENT OF DIVIDENDS RE15 CEIVED BY CONTROLLED FOREIGN CORPORA16 TIONS.—The rules of subsection (c)(5)(A) shall

17 apply to any interest-related dividend received

18 by a controlled foreign corporation (within the

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

20 dividend is attributable to interest received by

21 the regulated investment company which is de22 scribed in subclause (II) of section

23 871(k)(1)(E)(i) (and not described in subclause

24 (I) or (III) thereof).
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1 ‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—

2 No tax shall be imposed under paragraph (1) of sub3 section (a) on any short-term capital gain dividend

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

5 regulated investment company.’’.

6 (3) WITHHOLDING TAXES.—

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

8 amended by adding at the end thereof the fol9 lowing new paragraph:

10 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

11 REGULATED INVESTMENT COMPANIES.—

12 ‘‘(A) IN GENERAL.—No tax shall be re13 quired to be deducted and withheld under sub14 section (a) from any amount exempt from the

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

16 of section 871(k).

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

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

19 871(k)(1)(B) shall not apply to any dividend

20 unless the regulated investment company knows

21 that such dividend is a dividend referred to in

22 such clause. A similar rule shall apply with re23 spect to the exception contained in section

24 871(k)(2)(B).’’.
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1 (B) Subsection (a) of section 1442 is

2 amended—

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

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

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

6 (ii) by inserting before the period at

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

8 references in section 1441(c)(12) to sec9 tions 871(a) and 871(k) shall be treated as

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

11 (except that for purposes of applying sub12 paragraph (A) of section 1441(c)(12), as

13 so modified, clause (ii) of section

14 881(e)(1)(B) shall not apply to any divi15 dend unless the regulated investment com16 pany knows that such dividend is a divi17 dend referred to in such clause)’’.

18 (b) ESTATE TAX TREATMENT OF INTEREST IN CER19 TAIN REGULATED INVESTMENT COMPANIES.—Section

20 2105 (relating to property without the United States for

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

22 thereof the following new subsection:

23 ‘‘(d) STOCK IN A REGULATED INVESTMENT COM24 PANY.—
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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 the 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.

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