The Internal Revenue Service (IRS) has issued Notice 2006-101 with an updated list of the treaty countries whose corporations are eligible to qualify to pay dividends subject to reduced US individual income tax rates.
The reduced rates were enacted by The Jobs and Growth Tax Relief Act of 2003, which provided that dividends received by individuals are taxed at the same rates applicable to long-term capital gains. The reduction applies to dividends paid in taxable years beginning after 31 December 2002 and before 1 January 2011.
The tax rate reduction applies to dividends received from a domestic corporation and to dividends received from a foreign corporation if the foreign corporation meets either of the following requirements:
the foreign corporation is incorporated in a US possession or is eligible for benefits under a comprehensive income tax treaty with the United States which the Treasury Department determines to be satisfactory and which includes an exchange of information program (the "treaty test"); or
the stock of the foreign corporation is readily tradeable on an established securities market in the United States (the "readily tradeable test").
Notice 2006-101 updates the list of foreign countries that meet the treaty test. The original list was issued in Notice 2003-69. The new list takes into account the US income tax treaties and protocols that have entered into force since the publication of Notice 2003-69.
The new countries on the list are Bangladesh, Barbados, and Sri Lanka. The addition of Bangladesh is effective for dividends paid on or after 7 August 2006, the addition of Barbados is effective for dividends paid on or after 20 December 2004, and the addition of Sri Lanka is effective for dividends paid on or after 12 July 2004.
In order to satisfy the treaty test, the foreign corporation must be eligible to claim benefits under one of the listed treaties. This includes being a resident of the specified country and satisfying any other requirements of the treaty, including the limitation on benefits provision.
Three of the countries that were omitted from the original list in Notice 2003-69, i.e., Bermuda, the Netherlands Antilles, and the USSR with respect to the treaty dated 20 June 1973, continue to be omitted from the new list.