Excerpt from the Conference Report on H.R. 2491, the Balanced
Budget Act of 1995 (H.Rpt. 104-350, Nov. 16, 1995, pp. 1504-1506)
37. TAXATION OF CERTAIN STOCK GAINS OF FOREIGN PERSONS
(SECS. 12882 AND 12883 OF THE SENATE AMENDMENT)
Present law
- Disposition of stock in domestic corporations
Foreign persons generally are subject to a 30-percent U.S. tax on dividends received from a U.S.
corporation. Foreign persons generally are not subject to U.S. tax on gain realized on the
disposition of stock in a U.S. corporation (other than a U.S. real property holding corporation),
unless the gain is effectively connected with the conduct of a trade or business in the United States.
Many U.S. income tax treaties contain provisions that preclude the imposition of U.S. tax on such
gains realized by treaty-country residents.
- Limitation on treaty benefits
The United States has entered into bilateral income tax treaties with many foreign countries. A
function served by these treaties is to reduce the U.S. tax on U.S. source income earned by a
resident of a treaty country. Tax treaty abuse (or "treaty shopping") occurs when a person who is
not a resident of either country seeks certain benefits under the income tax treaty between the two
countries. Newer treaties negotiated by the United States usually contain a "Limitation on Benefit"
article that may deny treaty benefits to foreign persons that wish to "treaty-shop" the U.S. treaty
network. However, not all of the U.S. income tax treaties now in force contain such an
article.
House bill
No provision.
Senate amendment
- Disposition of stock in domestic corporation
Under the Senate amendment, where a foreign person owns, or has owned at any time during the
previous 5 years, 10 percent or more of the stock in a U.S. corporation, gain or loss from the
disposition of the stock is subject to U.S. income tax at graduated rates. Constructive ownership
rules apply in determining whether a foreign person is a 10-percent shareholder. In addition,
certain ownership interests are treated as stock for purposes of this provision.
Certain nonrecognition provisions that would otherwise apply to dispositions of U.S. stock are
suspended, and the Secretary of the Treasury is authorized to prescribe regulations providing the
extent to which nonrecognition provisions will apply for purposes of this provision. Special
alternative minimum tax rules apply in the case of nonresident aliens who recognize net gains on
dispositions of stock that are subject to this provision.
This tax generally is collected through withholding at the rate of 10 percent of the proceeds of the
disposition giving rise to the liability. Exceptions apply in cases of dispositions of stock that is
regularly traded on an established securities market. Amounts withheld in excess of the tax liability
are refundable.
This provision does not override any current U.S. income tax treaty obligations. However, in
certain cases where a treaty prevents the imposition of U.S. tax on stock gains of a qualified
resident of a treaty country (as defined below), the provision treats as dividends gain resulting
from any distribution in liquidation or redemption that would (but for the treaty) be subject to U.S.
tax. Dividend treatment only applies to such gain to the extent of the earnings and profits of the
distributing corporation which are attributable to the stock with respect to which the distribution is
made.
Effective date.—The provision generally is effective for dispositions after December
31, 1995. The withholding requirements are applicable only to dispositions occurring 6 months or
more after the date of enactment.
- Limitation on treaty benefits
The Senate amendment imposes a qualified resident requirement as a prerequisite for the reduction
of U.S. tax on a foreign entity under any treaty. For this purpose, a foreign entity that is a resident
of a foreign country is a qualified resident of such country unless (1) 50 percent or more (by
value) of the interests in such entity are owned (directly or indirectly) by individuals who are not
residents of such country or citizens or residents of the United States, or (2) 50 percent or more of
the entity's income is used (directly or indirectly) to meet liabilities to persons who are not
residents of the foreign country or citizens or residents of the United States. Special rules apply in
the case of entities that are publicly traded or that are wholly-owned by publicly-traded
corporations. The Secretary of the Treasury may, in certain cases, treat a foreign entity as a
qualified resident.
In addition, the Senate amendment provides that no person is entitled to benefits granted by the
United States under a treaty with respect to any income that bears a significantly lower tax under
the laws of the other treaty country than similar income arising from sources within such foreign
country derived by residents of such foreign country.
Effective date.—The provision takes effect on January 1, 1996, and applies to any
treaty whether entered into before, on, or after such date.
Conference agreement
The conference agreement does not include the Senate amendment.
Text of §§ 12882 and 12883 of the Original Senate Version of H.R. 2491
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