U.S.A: Consolidated Appropriations Act 2016: Impact for certain U.S. RIC and REIT distributions
In December 2015, the President of the United States signed into law H.R. 2029 the “Consolidated Appropriations Act, 2016”. This law has two main impacts on U.S. RIC and REIT distributions:
- Favourable tax provisions for interest-related dividends and short-term capital gains distributions paid by a Regulated Investment Company (RICs) have been retroactively reinstated as of 1 January 2015 and permanently implemented.
- The holding threshold in order for Real Estate Investment Trusts (REIT) capital gains dividends to be classified as ordinary dividends has been amended from 5% to 10%.
Background
U.S. RIC
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 2015, the President of the United States signed into law H.R. 2029 the “Consolidated Appropriations Act, 2016”. The law has retroactively reinstated the favourable tax provisions as of 1 January 2015 and made them permanent.
U.S. REIT
Under the American Jobs Creation Act of 2004, REITs capital gains dividends could be considered as ordinary dividends and reported as such under the following conditions:
- The distribution is received in respect of a class of stock that is regularly traded on an established securities market located in the U.S.A.;
- The beneficial owner did not, in the aggregate, own more than 5% of the outstanding shares of the class of stock at any time during the taxable year; and
- The beneficial owner is a non-U.S. person.
In December 2015, the President of the United States signed into law H.R. 2029 the “Consolidated Appropriations Act, 2016”. The law has modified the holding threshold in order for REITs capital gains dividends to be classified as ordinary dividends from 5% to 10%.
Impact on customers
U.S. RIC
As a result of the law approval, an original payment reported as ordinary dividend may be reclassified as summarised in the table below:
| Distribution made by a RIC with taxable year as of 1 January 2015 | ||||
| Income type | Income code | WHT rate | Tax adjustment | |
| Original payment | Dividend | 06 | 30% or DTT | N/A |
| Reclassified payment | 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 Banking1 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.
U.S. REIT
As a result of the law approval, REIT capital gains distributions occurring on or after 18 December 2015 may be treated as ordinary dividends for non-US beneficial owners who held 10% or less of the stock continuously during the tax year in which the REIT distribution is received.
Clearstream Banking will consider that the above conditions are met by default for all non-resident beneficial owners. As a result, REIT capital gains dividends will be reported by default as ordinary dividends and taxed accordingly.
Customers of Clearstream Banking not eligible to benefit from this classification are required to notify Clearstream accordingly, within the prescribed deadlines. In such cases, the distribution will be subject to 35% withholding tax, and reported under income code 24.
Further information
Refer to Tax treatment of U.S. REITs and RICs for further information.
For further information, please contact the Clearstream Banking Tax Help Desk or Clearstream Banking Client Services or your Relationship Officer.
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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.