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 re-
ferred 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 invest-
ment through a foreign mutual fund.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
(a) SHORT TITLE.—This Act may be cited as the
‘‘Investment Competitiveness Act’’.
(b) AMENDMENT OF 1986 CODE.—Whenever in this
Act an amendment or repeal is expressed in terms of an
amendment to, or repeal of, a section or other provision,
the reference shall be considered to be made to a section
or other provision of the Internal Revenue Code of 1986.
SEC. 2. TREATMENT OF CERTAIN DIVIDENDS OF REGU-
LATED INVESTMENT COMPANIES.
(a) TREATMENT OF CERTAIN DIVIDENDS.—
(1) NONRESIDENT ALIEN INDIVIDUALS.—Sec-
tion 871 (relating to tax on nonresident alien indi-
viduals) is amended by redesignating subsection (k)
as subsection (l) and by inserting after subsection (j)
the following new subsection:
‘‘(k) EXEMPTION FOR CERTAIN DIVIDENDS OF REG-
ULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any interest-related dividend received from a
regulated investment company.
‘‘(B) 
EXCEPTIONS.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any interest-related dividend
received from a regulated investment com-
pany by a person to the extent such divi-
dend is attributable to interest (other than
interest 
described 
in 
subparagraph
(E)(i)(I) or (III) or (E)(ii)) received by
such company on indebtedness issued by
such person or by any corporation or part-
nership with respect to which such person
is a 10-percent shareholder,
‘‘(ii) to any interest-related dividend
with respect to stock of a regulated invest-
ment company unless the person who
would otherwise be required to deduct and
withhold tax from such dividend under
chapter 3 receives a statement (which
meets requirements similar to the require-
ments of subsection (h)(5)) that the bene-
ficial owner of such stock is not a United
States person, and
‘‘(iii) to any interest-related dividend
paid to any person within a foreign coun-
try (or any interest-related dividend pay-
ment addressed to, or for the account of,
persons within such foreign country) dur-
ing any period described in subsection
(h)(6) with respect to such country.
Clause (iii) shall not apply to any dividend with
respect to any stock which was acquired on or
before the date of the publication of the Sec-
retary’s determination under subsection (h)(6).
‘‘(C) INTEREST-RELATED DIVIDEND.—For
purposes of this paragraph, an interest-related
dividend is any dividend (or part thereof) which
is designated by the regulated investment com-
pany as an interest-related dividend in a writ-
ten notice mailed to its shareholders not later
than 60 days after the close of its taxable year.
If the aggregate amount so designated with re-
spect to a taxable year of the company (includ-
ing amounts so designated with respect to divi-
dends paid after the close of the taxable year
described in section 855) is greater than the
qualified net interest income of the company for
such taxable year, the portion of each distribu-
tion which shall be an interest-related dividend
shall be only that portion of the amounts so
designated which such qualified net interest in-
come bears to the aggregate amount so des-
ignated.
‘‘(D) 
QUALIFIED
NET
INTEREST
IN-
COME.—For purposes of subparagraph (C), the
term ‘qualified net interest income’ means the
qualified interest income of the regulated in-
vestment company reduced by the deductions
properly allocable to such income.
‘‘(E) QUALIFIED INTEREST INCOME.—For
purposes of subparagraph (D), the term ‘quali-
fied interest income’ means the sum of—
‘‘(i) the following amounts derived by
the regulated investment company from
sources within the United States—
‘‘(I) any amount includible in
gross income as original issue dis-
count (within the meaning of section
1273) on an obligation payable 183
days or less from the date of original
issue (without regard to the period
held by the company);
‘‘(II) any interest includible in
gross income (including amounts rec-
ognized as ordinary income in respect
of original issue discount or market
discount or acquisition discount under
part V of subchapter P and such
other amounts as regulations may
provide) on an obligation which is in
registered form; except that this
clause shall not apply to any interest
on an obligation issued by a corpora-
tion or partnership if the regulated in-
vestment company is a 10-percent
shareholder in such corporation or
partnership, and to any interest which
is treated as not being portfolio inter-
est under the rules of subsection
(h)(4);
‘‘(III) any interest referred to in
subsection (i)(2)(A) (without regard
to the trade or business of the regu-
lated investment company); and
‘‘(IV) any interest-related divi-
dend includible in gross income with
respect to stock of another regulated
investment company; and
‘‘(ii) any interest derived by the regu-
lated investment company from sources
outside the United States other than inter-
est that is subject to a tax imposed by a
foreign jurisdiction if the amount of such
tax is reduced (or eliminated) by a treaty
with the United States.
‘‘(F) 10-PERCENT
SHAREHOLDER.—For
purposes of this paragraph, the term ‘10-per-
cent shareholder’ has the meaning given to such
term by subsection (h)(3)(B).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1)(A) of subsection (a) on
any short-term capital gain dividend received
from a regulated investment company.
‘‘(B) EXCEPTION
FOR
ALIENS
TAXABLE
UNDER SUBSECTION (a)(2).—Subparagraph (A)
shall not apply in the case of any nonresident
alien individual subject to tax under subsection
(a)(2).
‘‘(C) SHORT-TERM
CAPITAL
GAIN
DIVI-
DEND.—For purposes of this paragraph, a
short-term capital gain dividend is any dividend
(or part thereof) which is designated by the reg-
ulated investment company as a short-term cap-
ital gain dividend in a written notice mailed to
its shareholders not later than 60 days after the
close of its taxable year. If the aggregate
amount so designated with respect to a taxable
year of the company (including amounts so des-
ignated with respect to dividends paid after the
close of the taxable year described in section
855) is greater than the qualified short-term
gain of the company for such taxable year, the
portion of each distribution which shall be a
short-term capital gain dividend shall be only
that portion of the amounts so designated
which such qualified short-term gain bears to
the aggregate amount so designated.
‘‘(D) QUALIFIED SHORT-TERM GAIN.—For
purposes of subparagraph (C), the term ‘quali-
fied short-term gain’ means the excess of the
net short-term capital gain of the regulated in-
vestment company for the taxable year over the
net long-term capital loss (if any) of such com-
pany for such taxable year. For purposes of this
subparagraph—
‘‘(i) the net short-term capital gain of
the regulated investment company shall be
computed by treating any short-term cap-
ital gain dividend includible in gross in-
come with respect to the stock of another
regulated investment company as a short-
term capital gain, and
‘‘(ii) the excess of the net short-term
capital gain for a taxable year over the net
long-term capital loss for a taxable year (to
which an election under section 4982(e)(4)
does not apply) shall be determined with-
out regard to any net capital loss or net
short-term capital loss attributable to
transactions after October 31 of such year,
and any such net capital loss or net short-
term capital loss shall be treated as arising
on the 1st day of the next taxable year.
To the extent provided in regulations, clause
(ii) shall apply also for purposes of computing
the taxable income of the regulated investment
company.’’.
(2) FOREIGN CORPORATIONS.—Section 881 is
amended by redesignating subsection (e) as sub-
section (f) and by inserting after subsection (d) the
following new subsection:
‘‘(e) TAX NOT TO APPLY TO CERTAIN DIVIDENDS
OF REGULATED INVESTMENT COMPANIES.—
‘‘(1) INTEREST-RELATED DIVIDENDS.—
‘‘(A) IN GENERAL.—Except as provided in
subparagraph (B), no tax shall be imposed
under paragraph (1) of subsection (a) on any
interest-related dividend (as defined in section
871(k)(1)) received from a regulated investment
company.
‘‘(B) 
EXCEPTION.—Subparagraph 
(A)
shall not apply—
‘‘(i) to any dividend referred to in sec-
tion 871(k)(1)(B), and
‘‘(ii) to any interest-related dividend
received by a controlled foreign corporation
(within the meaning of section 957(a)) to
the extent such dividend is attributable to
interest received by the regulated invest-
ment company from a person who is a re-
lated person (within the meaning of section
864(d)(4)) with respect to such controlled
foreign corporation.
‘‘(C) TREATMENT
OF
DIVIDENDS
RE-
CEIVED
BY
CONTROLLED
FOREIGN
CORPORA-
TIONS.—The rules of subsection (c)(5)(A) shall
apply to any interest-related dividend received
by a controlled foreign corporation (within the
meaning of section 957(a)) to the extent such
dividend is attributable to interest received by
the regulated investment company which is de-
scribed 
in 
subclause 
(II) 
of 
section
871(k)(1)(E)(i) (and not described in subclause
(I) or (III) thereof).
‘‘(2) SHORT-TERM CAPITAL GAIN DIVIDENDS.—
No tax shall be imposed under paragraph (1) of sub-
section (a) on any short-term capital gain dividend
(as defined in section 871(k)(2)) received from a
regulated investment company.’’.
(3) WITHHOLDING TAXES.—
(A) Subsection (c) of section 1441 is
amended by adding at the end thereof the fol-
lowing new paragraph:
‘‘(12) CERTAIN
DIVIDENDS
RECEIVED
FROM
REGULATED INVESTMENT COMPANIES.—
‘‘(A) IN GENERAL.—No tax shall be re-
quired to be deducted and withheld under sub-
section (a) from any amount exempt from the
tax imposed by section 871(a)(1)(A) by reason
of section 871(k).
‘‘(B) SPECIAL
RULE.—For purposes of
subparagraph 
(A), 
clause 
(i) 
of 
section
871(k)(1)(B) shall not apply to any dividend
unless the regulated investment company knows
that such dividend is a dividend referred to in
such clause. A similar rule shall apply with re-
spect to the exception contained in section
871(k)(2)(B).’’.
(B) Subsection (a) of section 1442 is
amended—
(i) by striking ‘‘and the reference in
section 1441(c)(10)’’ and inserting ‘‘the
reference in section 1441(c)(10)’’, and
(ii) by inserting before the period at
the end thereof the following: ‘‘, and the
references in section 1441(c)(12) to sec-
tions 871(a) and 871(k) shall be treated as
referring to sections 881(a) and 881(e)
(except that for purposes of applying sub-
paragraph (A) of section 1441(c)(12), as
so 
modified, 
clause 
(ii) 
of 
section
881(e)(1)(B) shall not apply to any divi-
dend unless the regulated investment com-
pany knows that such dividend is a divi-
dend referred to in such clause)’’.
(b) ESTATE TAX TREATMENT OF INTEREST IN CER-
TAIN
REGULATED
INVESTMENT
COMPANIES.—Section
2105 (relating to property without the United States for
estate tax purposes) is amended by adding at the end
thereof the following new subsection:
‘‘(d) STOCK IN A REGULATED INVESTMENT COM-
PANY.—
‘‘(1) IN GENERAL.—For purposes of this sub-
chapter, stock in a regulated investment company
(as defined in section 851) owned by a nonresident
not a citizen of the United States shall not be
deemed property within the United States in the
proportion that, at the end of the quarter of such in-
vestment company’s taxable year immediately pre-
ceding the decedent’s date of death (or at such other
time as the Secretary may designate in regulations),
the assets of the investment company that were
qualifying assets with respect to the decedent bore
to the total assets of the investment company.
‘‘(2) QUALIFYING
ASSETS.—For purposes of
this subsection, qualifying assets with respect to a
decedent are assets that, if owned directly by the de-
cedent, would have been—
‘‘(A) amounts, deposits, or debt obligations
described in subsection (b) of this section,
‘‘(B) debt obligations described in the last
sentence of section 2104(c), or
‘‘(C) other property not within the United
States.’’.
(c) TREATMENT OF REGULATED INVESTMENT COM-
PANIES UNDER SECTION 897.—
(1) Paragraph (1) of section 897(h) is amended
by striking ‘‘REIT’’ each place it appears and in-
serting ‘‘qualified investment entity’’.
(2) Paragraphs (2) and (3) of section 897(h)
are amended to read as follows:
‘‘(2) SALE OF STOCK IN DOMESTICALLY-CON-
TROLLED ENTITY NOT TAXED.—The term ‘United
States real property interest’ does not include any
interest in a domestically-controlled qualified invest-
ment entity.
‘‘(3) DISTRIBUTIONS
BY
DOMESTICALLY-CON-
TROLLED
QUALIFIED
INVESTMENT
ENTITIES.—In
the case of a domestically-controlled qualified invest-
ment entity, rules similar to the rules of subsection
(d) shall apply to the foreign ownership percentage
of any gain.’’.
(3) Subparagraphs (A) and (B) of section
897(h)(4) are amended to read as follows:
‘‘(A) QUALIFIED INVESTMENT ENTITY.—
The term ‘qualified investment entity’ means
any real estate investment trust and any regu-
lated investment company.
‘‘(B) DOMESTICALLY-CONTROLLED.—The
term ‘domestically-controlled qualified invest-
ment entity’ means any qualified investment en-
tity in which at all times during the testing pe-
riod less than 50 percent in value of the stock
was held directly or indirectly by foreign per-
sons.’’.
(4) Subparagraphs (C) and (D) of section
897(h)(4) are each amended by striking ‘‘REIT’’
and inserting ‘‘qualified investment entity’’.
(5) The subsection heading for subsection (h) of
section 897 is amended by striking ‘‘REITS’’ and
inserting ‘‘CERTAIN INVESTMENT ENTITIES’’.
(d) EFFECTIVE DATE.—
(1) IN
GENERAL.—Except as otherwise pro-
vided in this subsection, the amendments made by
this section shall apply to dividends with respect to
taxable years of regulated investment companies be-
ginning after the date of the enactment of this Act.
(2) ESTATE
TAX
TREATMENT.—The amend-
ment made by subsection (b) shall apply to estates
of decedents dying after the date of the enactment
of this Act.
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