Under present law, non-resident aliens and foreign corporations generally are not subject to tax on the gain realized upon the disposition of stock in a U.S. corporation. If the gain is effectively connected to the conduct of the foreign person's trade or business in the U.S., or if the stock of the U.S. corporation represents an equity interest in U.S. real property, however, such gain is taxable. Under the Foreign Tax Act, the relevant tax rates are those generally applicable to U.S. persons. Thus, withholding will often exceed the tax liability and, in certain cases, a taxpayer may be required to apply for a refund without interest. Override of Certain Treaty Benefits Under most tax treaties currently in effect, the tax paid by residents of the treaty country is reduced or eliminated with respect to many types of U.S. income.
Special rules apply to publicly- traded entities.
The Foreign Tax Act also proposes to treat the gain realized by a qualified resident on a distribution in liquidation or redemption of stock as a dividend to the extent of that corporation's earnings and profits. In effect, this treatment subjects the gain to the tax applicable to dividends, rather than allow it to remain untaxed under the treaty as a gain on the sale of stock. Tax on Certain Tax-Favored Income Many countries with which the U.S. currently has treaties tax income from sources within the U.S. at a significantly lower rate than similar income from sources within the treaty country. Thus, residents of the treaty country who derive income from the U.S. obtain the benefit of the treaty and pay a lower rate on such income in the treaty country than they would pay if the income had been derived from the treaty country. The benefit of such tax- favored income is perceived as a treaty abuse.