Example: Abygail is rez and citizen of HK. Owns 100% of US Corp which
pays her a dividend.
What is the source of the dividend?
Source of dividend= US= resident of payor. Since US sourced
income, US says want to take tax on that income, subject to US
How will it be subject to US taxation?
Abygail maybe never steps foot in US, just owns US corp. US corp
sells water bottles, earns a bunch of income, after it earns income,
wants to pay out income to Aby = dividend.
If distribution not taxed, nonrez aliens would have unfair
advantage over US residents b/c at US corporate level, it
doesn’t matter who the other SHs are, US corp will always pay
US tax on income.
• If only US person subject to tax on div income, nonUS person,
better off if nonUS person who owned US corp because you
wouldn’t be subject to US tax on dividend.
• But if I’m a US person, not only does the corp pay tax, but I do
too @ a tax rate of 20% if qualified + 3.8% net investment
income tax @federal- 23.8% (US individuals who receive divs
from US corporations).
What if a US individual receives a div from a foreign corp? US
individual owns foreign corp. Does he get qualified div treatment on that
• A foreign corp owned by US individual, pays individual div. Source of
div= foreign sourced because it’s coming from a foreign corp. As a
US person, pay tax on WW income, no exemption. Only applies to
US corps, not US individuals.
Does individual get qualified div rate?
• It would be a qual div if you own it for the period of time that enables
it to be qualified + treaty benefits have to be available. If it applies
(income tax treaty between whichever country foreign corp organized
in + US) and income tax treaty would apply, then you will get qual div
treatment. So even though it’s from a foreign corp, I’m still entitled to
qual div rates.