I

105TH CONGRESS

1ST SESSION H. R. 707

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

FEBRUARY 12, 1997

Mr. CRANE (for himself, Ms. DUNN, and Mr. MCDERMOTT) 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 of 1997’’.

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
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1 qualified interest income of the regulated in2 vestment company reduced by the deductions

3 properly allocable to such income.

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

5 purposes of subparagraph (D), the term ‘quali6 fied interest income’ means the sum of the fol7 lowing amounts derived by the regulated invest8 ment company from sources within the United

9 States:

10 ‘‘(i) Any amount includible in gross

11 income as original issue discount (within

12 the meaning of section 1273) on an obliga13 tion payable 183 days or less from the date

14 of original issue (without regard to the pe15 riod held by the company).

16 ‘‘(ii) Any interest includible in gross

17 income (including amounts recognized as

18 ordinary income in respect of original issue

19 discount or market discount or acquisition

20 discount under part V of subchapter P and

21 such other amounts as regulations may

22 provide) on an obligation which is in reg23 istered form; except that this clause shall

24 not apply to—
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1 ‘‘(I) any interest on an obligation

2 issued by a corporation or partnership

3 if the regulated investment company

4 is a 10-percent shareholder in such

5 corporation or partnership, and

6 ‘‘(II) any interest which is treat7 ed as not being portfolio interest

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

9 ‘‘(iii) Any interest referred to in sub10 section (i)(2)(A) (without regard to the

11 trade or business of the regulated invest12 ment company).

13 ‘‘(iv) Any interest-related dividend in14 cludible in gross income with respect to

15 stock of another regulated investment com16 pany.

17 ‘‘(F) 10-PERCENT SHAREHOLDER.—For

18 purposes of this paragraph, the term ‘10-per19 cent shareholder’ has the meaning given to such

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

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

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

23 subparagraph (B), no tax shall be imposed

24 under paragraph (1)(A) of subsection (a) on
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1 any short-term capital gain dividend received

2 from a regulated investment company.

3 ‘‘(B) EXCEPTION FOR ALIENS TAXABLE

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

5 shall not apply in the case of any nonresident

6 alien individual subject to tax under subsection

7 (a)(2).

8 ‘‘(C) SHORT-TERM CAPITAL GAIN DIVI9 DEND.—For purposes of this paragraph, a

10 short-term capital gain dividend is any dividend

11 (or part thereof) which is designated by the reg12 ulated investment company as a short-term cap13 ital gain dividend in a written notice mailed to

14 its shareholders not later than 60 days after the

15 close of its taxable year. If the aggregate

16 amount so designated with respect to a taxable

17 year of the company (including amounts so des18 ignated with respect to dividends paid after the

19 close of the taxable year described in section

20 855) is greater than the qualified short-term

21 gain of the company for such taxable year, the

22 portion of each distribution which shall be a

23 short-term capital gain dividend shall be only

24 that portion of the amounts so designated
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1 which such qualified short-term gain bears to

2 the aggregate amount so designated.

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

4 purposes of subparagraph (C), the term ‘quali5 fied short-term gain’ means the excess of the

6 net short-term capital gain of the regulated in7 vestment company for the taxable year over the

8 net long-term capital loss (if any) of such com9 pany for such taxable year. For purposes of this

10 subparagraph—

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

12 the regulated investment company shall be

13 computed by treating any short-term cap14 ital gain dividend includible in gross in15 come with respect to the stock of another

16 regulated investment company as a short17 term capital gain, and

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

19 capital gain for a taxable year over the net

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

21 which an election under section 4982(e)(4)

22 does not apply) shall be determined with23 out regard to any net capital loss or net

24 short-term capital loss attributable to

25 transactions after October 31 of such year,
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1 and any such net capital loss or net short2 term capital loss shall be treated as arising

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

4 To the extent provided in regulations, clause

5 (ii) shall apply also for purposes of computing

6 the taxable income of the regulated investment

7 company.’’.

8 (2) FOREIGN CORPORATIONS.—Section 881 is

9 amended by redesignating subsection (e) as sub10 section (f) and by inserting after subsection (d) the

11 following new subsection:

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

13 OF REGULATED 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) of subsection (a) on any

18 interest-related dividend (as defined in section

19 871(k)(1)) received from a regulated investment

20 company.

21 ‘‘(B) EXCEPTION.—Subparagraph (A)

22 shall not apply—

23 ‘‘(i) to any dividend referred to in sec24 tion 871(k)(1)(B), and
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1 ‘‘(ii) to any interest-related dividend

2 received by a controlled foreign corporation

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

4 the extent such dividend is attributable to

5 interest received by the regulated invest6 ment company from a person who is a re7 lated person (within the meaning of section

8 864(d)(4)) with respect to such controlled

9 foreign corporation.

10 ‘‘(C) TREATMENT OF DIVIDENDS RE11 CEIVED BY CONTROLLED FOREIGN CORPORA12 TIONS.—The rules of subsection (c)(5)(A) shall

13 apply to any interest-related dividend received

14 by a controlled foreign corporation (within the

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

16 dividend is attributable to interest received by

17 the regulated investment company which is de18 scribed in clause (ii) of section 871(k)(1)(E)

19 (and not described in clause (i) or (iii) of such

20 section).

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

22 No tax shall be imposed under paragraph (1) of sub23 section (a) on any short-term capital gain dividend

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

25 regulated investment company.’’.
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1 (3) WITHHOLDING TAXES.—

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

3 amended by adding at the end thereof the fol4 lowing new paragraph:

5 ‘‘(12) CERTAIN DIVIDENDS RECEIVED FROM

6 REGULATED INVESTMENT COMPANIES.—

7 ‘‘(A) IN GENERAL.—No tax shall be re8 quired to be deducted and withheld under sub9 section (a) from any amount exempt from the

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

11 of section 871(k).

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

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

14 871(k)(1)(B) shall not apply to any dividend

15 unless the regulated investment company knows

16 that such dividend is a dividend referred to in

17 such clause. A similar rule shall apply with re18 spect to the exception contained in section

19 871(k)(2)(B).’’.

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

21 amended—

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

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

24 reference in section 1441(c)(10)’’, and
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1 (ii) by inserting before the period at

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

3 references in section 1441(c)(12) to sec4 tions 871(a) and 871(k) shall be treated as

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

6 (except that for purposes of applying sub7 paragraph (A) of section 1441(c)(12), as

8 so modified, clause (ii) of section

9 881(e)(1)(B) shall not apply to any divi10 dend unless the regulated investment com11 pany knows that such dividend is a divi12 dend referred to in such clause)’’.

13 (b) ESTATE TAX TREATMENT OF INTEREST IN CER14 TAIN REGULATED INVESTMENT COMPANIES.—Section

15 2105 (relating to property without the United States for

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

17 thereof the following new subsection:

18 ‘‘(d) STOCK IN A REGULATED INVESTMENT COM19 PANY.—

20 ‘‘(1) IN GENERAL.—For purposes of this sub21 chapter, stock in a regulated investment company

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

23 not a citizen of the United States shall not be

24 deemed property within the United States in the
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1 proportion that, at the end of the quarter of such in2 vestment company’s taxable year immediately pre3 ceding the decedent’s date of death (or at such other

4 time as the Secretary may designate in regulations),

5 the assets of the investment company that were

6 qualifying assets with respect to the decedent bore

7 to the total assets of the investment company.

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

9 this subsection, qualifying assets with respect to a

10 decedent are assets that, if owned directly by the de11 cedent, would have been—

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

13 described in subsection (b) of this section,

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

15 sentence of section 2104(c), or

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

17 States.’’.

18 (c) TREATMENT OF REGULATED INVESTMENT COM19 PANIES UNDER SECTION 897.—

20 (1) Paragraph (1) of section 897(h) is amended

21 by striking ‘‘REIT’’ each place it appears and in22 serting ‘‘qualified investment entity’’.

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

24 are amended to read as follows:
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1 ‘‘(2) SALE OF STOCK IN DOMESTICALLY-CON2 TROLLED ENTITY NOT TAXED.—The term ‘United

3 States real property interest’ does not include any

4 interest in a domestically-controlled qualified invest5 ment entity.

6 ‘‘(3) DISTRIBUTIONS BY DOMESTICALLY-CON7 TROLLED QUALIFIED INVESTMENT ENTITIES.—In

8 the case of a domestically-controlled qualified invest9 ment entity, rules similar to the rules of subsection

10 (d) shall apply to the foreign ownership percentage

11 of any gain.’’.

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

13 897(h)(4) are amended to read as follows:

14 ‘‘(A) QUALIFIED INVESTMENT ENTITY.—

15 The term ‘qualified investment entity’ means

16 any real estate investment trust and any regu17 lated investment company.

18 ‘‘(B) DOMESTICALLY-CONTROLLED.—The

19 term ‘domestically-controlled qualified invest20 ment entity’ means any qualified investment en21 tity in which at all times during the testing pe22 riod less than 50 percent in value of the stock

23 was held directly or indirectly by foreign per24 sons.’’.
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1 (4) Subparagraphs (C) and (D) of section

2 897(h)(4) are each amended by striking ‘‘REIT’’

3 and inserting ‘‘qualified investment entity’’.

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

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

6 inserting ‘‘CERTAIN INVESTMENT ENTITIES’’.

7 (d) EFFECTIVE DATE.—

8 (1) IN GENERAL.—Except as otherwise pro9 vided in this subsection, the amendments made by

10 this section shall apply to dividends with respect to

11 taxable years of regulated investment companies be12 ginning after the date of the enactment of this Act.

13 (2) ESTATE TAX TREATMENT.—The amend14 ment made by subsection (b) shall apply to estates

15 of decedents dying after the date of the enactment

16 of this Act.

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