Qualified Dividends From Foreign Corporations

Attention U.S. Expats! Your foreign dividends may be qualified to be taxed at a special lower tax rate. Here’s how you can know if they are:

When you receive dividends from a US corporation, your Form 1099 will specify whether they are qualified dividends or not. Qualified dividends are eligible for a much lower tax rate that of ordinary dividends. However, what about dividends received from a foreign corporation? These are also reported and taxed on your annual US tax return. Can they be eligible for the special lower tax rate for qualified dividends?

In order to be considered “qualified”, dividends received must meet three conditions:

1. The dividends must have been paid by a U.S. corporation or a qualified foreign corporation.
2. The dividends are not of those listed under “Dividends that are not qualified dividends”. 
3. The holding period requirement is met.

Let us discuss these three conditions in more detail, so that we will have the tools to determine whether your foreign dividends are qualified or not.

What is meant by a “qualified foreign corporation”?

A foreign corporation is considered “qualified” when it meets any one of the following three conditions:

1. The corporation is incorporated in a U.S. possession.
2. The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. Following is a list of countries holding such treaties.

3.   The stock for which the dividend is paid is readily tradable on an established securities market in the United States.

Readily tradable stock is any stock (including common, ordinary, or preferred) or an American depositary receipt in respect of that stock, if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. For a list of the exchanges that meet these requirements, see www.sec.gov/divisions/marketreg/mrexchanges.shtml.

Which dividends are specifically excluded from the category of qualified dividends?

The following dividends are not qualified dividends, even if they are marked as such on a Form 1099-DIV.

• Capital gain distributions.
• Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U.S. building and loan associations, U.S. savings and loan associations, federal savings and loan associations, and similar financial institutions.
• Dividends from a corporation that is a tax-exempt organization or farmer’s cooperative during the corporation’s tax year in which the dividends were paid or during the corporation’s previous tax year.
• Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation.
• Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property.
• Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends.

What is the holding period requirement?

The stocks must have been held for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Instead, the seller will get the dividend.

When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it.