TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES.

SEC. 411. TREATMENT OF CERTAIN DIVIDENDS OF REGULATED INVESTMENT COMPANIES.(a) Treatment of Certain Dividends.—(1) Nonresident alien individuals.—Section 871 (relating to tax on nonresident alien individuals) 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 Regulated 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 company by a person to the extent such dividend is attributable to interest (other than interest described in subparagraph (E) (i) or (iii)) received by such company on indebtedness issued by such person or by any corporation or partnership with respect to which such person is a 10-percent shareholder,“(ii) to any interest-related dividend with respect to stock of a regulated investment company unless the person who would otherwise be required to deduct and withhold tax from such dividend under chapter 118 STAT. 1501 3 receives a statement (which meets requirements similar to the requirements of subsection (h)(5)) that the beneficial owner of such stock is not a United States person, and“(iii) to any interest-related dividend paid to any person within a foreign country (or any interest-related dividend payment addressed to, or for the account of, persons within such foreign country) during 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 Secretary’s determination under subsection (h)(6).“(C) Interest-related dividend.—For purposes of this paragraph, the term ‘interest-related dividend’ means any dividend (or part thereof) which is designated by the regulated investment company as an interest-related 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 designated with respect to dividends 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 distribution which shall be an interest-related dividend shall be only that portion of the amounts so designated which such qualified net interest income bears to the aggregate amount so designated. Such term shall not include any dividend with respect to any taxable year of the company beginning after December 31, 2007.“(D) Qualified net interest income.—For purposes of subparagraph (C), the term ‘qualified net interest income’ means the qualified interest income of the regulated investment company reduced by the deductions properly allocable to such income. “(E) Qualified interest income.—For purposes of subparagraph (D), the term ‘qualified interest income’ means the sum of 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 discount (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 recognized 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—“(I) any interest on an obligation issued by a corporation or partnership if the regulated 118 STAT. 1502 investment company is a 10-percent shareholder in such corporation or partnership, and“(II) any interest which is treated as not being portfolio interest 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 regulated investment company).“(iv) Any interest-related dividend includable in gross income with respect to stock of another regulated investment company.“(F) 10-percent shareholder.—For purposes of this paragraph, the term ‘10-percent shareholder’ has the meaning given 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 dividend.—For purposes of this paragraph, the term ‘short-term capital gain dividend’ means any dividend (or part thereof) which is designated by the regulated investment company as a short-term capital 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 designated 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. Such term shall not include any dividend with respect to any taxable year of the company beginning after December 31, 2007.“(D) Qualified short-term gain.—For purposes of subparagraph (C), the term ‘qualified short-term gain’ means the excess of the net short-term capital gain of the regulated investment company for the taxable year over the net long-term capital loss (if any) of such company 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 capital gain dividend includible in gross income with respect to 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 without regard to any net capital loss or net short-term capital 118 STAT. 1503 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 (relating to tax on income of foreign corporations not connected with United States business) is amended by redesignating subsection (e) as subsection (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 section 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 investment company from a person who is a related person (within the meaning of section 864(d)(4)) with respect to such controlled foreign corporation. “(C) Treatment of dividends received by controlled foreign corporations.—The rules of subsection (c)(5)(A) shall apply to any (within the meaning of section 957(a)) to the extent such dividend is attributable to interest received by the regulated investment company which is described in clause (ii) of section 871(k)(1)(E) (and not described in clause (i) or (iii) of such section).“(2) Short-term capital gain dividends.—No tax shall be imposed under paragraph (1) of subsection (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) Section 1441(c) (relating to exceptions) is amended by adding at the end the following new paragraph:“(12) Certain dividends received from regulated investment companies.—“(A) In general.—No tax shall be required to be deducted and withheld under subsection (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 respect to the exception contained in section 871(k)(2)(B).”. 118 STAT. 1504(B) Section 1442(a) (relating to withholding of tax on foreign corporations) 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 the following: “, and the references in section 1441(c)(12) to sections 871(a) and 871(k) shall be treated as referring to sections 881(a) and 881(e) (except that for purposes of applying subparagraph (A) of section 1441(c)(12), as so modified, clause (ii) of section 881(e)(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)”.(b) Estate Tax Treatment of Interest in Certain Regulated Investment Companies.—Section 2105 (relating to property without the United States for estate tax purposes) is amended by adding at the end the following new subsection:“(d) Stock in a RIC.—“(1) In general.—For purposes of this subchapter, 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 investment company’s taxable year immediately preceding a 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 decedent, 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.“(3) Termination.—This subsection shall not apply to estates of decedents dying after December 31, 2007.”.(c) Treatment of Regulated Investment Companies Under Section 897.—(1) Paragraph (1) of section 897(h) is amended by striking “REIT” each place it appears and inserting “qualified investment entity”.(2) Paragraphs (2) and (3) of section 897(h) are amended to read as follows:“(2) Sale of stock in domestically controlled entity not taxed.—The term ‘United States real property interest’ does not include any interest in a domestically controlled qualified investment entity.“(3) Distributions by domestically controlled qualified investment entities.—In the case of a domestically controlled qualified investment 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:118 STAT. 1505 “(A) Qualified investment entity.—“(i) In general.—The term ‘qualified investment entity’ means—“(I) any real estate investment trust, and “(II) any regulated investment company.“(ii) Termination.—Clause (i)(II) shall not apply after December 31, 2007.“(B) Domestically controlled.—The term ‘domestically controlled qualified investment entity’ means any qualified investment entity in which at all times during the testing period less than 50 percent in value of the stock was held directly or indirectly by foreign persons.”.(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 provided in this subsection, the amendments made by this section shall apply to dividends with respect to taxable years of regulated investment companies beginning after December 31, 2004.(2) Estate tax treatment.—The amendment made by subsection (b) shall apply to estates of decedents dying after December 31, 2004.(3) Certain other provisions.—The amendments made by subsection (c) (other than paragraph (1) thereof) shall take effect after December 31, 2004.