U.S.A: Revised tax treatment for certain U.S. RIC distributions
Effective retroactively
for the calendar year 2014
favourable tax provisions for interest-related dividends and short-term capital gains distributions paid by a Regulated Investment Company (RICs), have been reinstated.
Background
Before the American Jobs Creation Act of 2004 (the “Act”), RIC distributions were treated as ordinary dividends and were subject to the same Non-Resident Alien (NRA) withholding tax rate as applied to ordinary dividend distributions.
In 2004, the Act provided for the relief from NRA withholding tax for short-term capital gains and interest-related dividends paid by RICs but for a limited period only. Since then, “tax extender” bills have extended the application of the provisions scheduled to expire. On December 2014, tax extender H.R. 5771 (Tax Increase Prevention Act of 2014), was approved for a period of one year with retroactive effect to 1 January 2014.
Impact on customers
As a result of the extension of the Act, an original payment reported as ordinary dividend could be reclassified as summarised in the table below:
| Distribution made by a RIC with taxable year between 1 January 2014 and 31 December 2014 | ||||||
| Original payment | Reclassified payment | |||||
| income type | income code | WHT rate applied | income type | income code | WHT rate | tax adjustment |
| ---------------------------------------------------------------------------------------------------------- | ||||||
| dividend | 06 | 30% or DTT | dividend | 06 | 30% or DTT | N/A |
| ---------------------------------------------------------------------------------------------------------- | ||||||
| return of capital | 37 | 0% | 30% or DTT reclaimable by beneficiary from IRS | |||
| interest-related dividend | 01 | 30% or 0% | 30% reclaimable by beneficiary from IRS | |||
| capital gain | 36 | 0% | 30% or DTT reclaimable by beneficiary from IRS | |||
Note: QI-A and QI-B accounts will always be paid gross on all income types.
At the time of the initial income distribution, the classification may not yet be known, in which case the RICs income will be taxed as an ordinary dividend during the year of the distribution.
Once notified by the RIC of the reclassification details of the income distribution, we will in turn reflect those details in our customer’s RIC income distribution, thereby amending accordingly the 1042-S reporting.
Refund of tax withheld at source is not possible when the dividend is reclassified as return of capital, interest-related dividend or as capital gains. The QI agreement does not grant us the possibility of such refunds after 15 March and, therefore, Clearstream Banking has no possibility to claim and get a refund from the IRS. Only the final beneficial owner is allowed to claim such refund directly from the IRS.
Further information
For further information, customers may contact the Clearstream Banking1 Tax Help Desk.
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1. Clearstream Banking refers collectively to Clearstream Banking AG, registered office at 61, Mergenthalerallee, 65760 Eschborn, Germany and registered in Register B of the Amtsgericht Frankfurt am Main, Germany under number HRB 7500, and Clearstream Banking S.A., registered office at 42, avenue John F. Kennedy, L-1855 Luxembourg, and registered with the Luxembourg Trade and Companies Register under number B-9248.