Discussion:NR Foreign dividend from Mutual funds

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Discussion Forum Index --> Basic Tax Questions --> NR Foreign dividend from Mutual funds


Discussion Forum Index --> Tax Questions --> NR Foreign dividend from Mutual funds

Esctan (talk|edits) said:

20 September 2008
I have a Non Resident alien client who has foreign dividend from mutual funds located in U.S. Can she exclude the percentage of foreign dividend from dividends paid from these international or global funds?

WillyB (talk|edits) said:

20 September 2008
Yes. Section 871(a) imposes a tax on U.S. source (passive) income.

Riley2 (talk|edits) said:

21 September 2008
If the mutual fund is formed under US law, I see nothing in the law that would allow the nonresident alien taxpayer to exclude a portion of the dividend from gross income. See Sec. 861.

Lizzit (talk|edits) said:

21 September 2008
Yes. All mutual fund dividends are composed of (a) dividends, (b) ST cap gains, and (c) LT cap gains.

The ST & LT cap gains are completely exempt from US tax, so it pays to have a statement showing what percentage of the dividends shown in box 1a of 1099-DIV are ST cap gains, as well as what percentage of box 1a are from foreign dividends.

This week I saved a client $5,000 in US tax by making him go back to the bank and get this info.

Lizzit (talk|edits) said:

21 September 2008
I should note that I'm disagreeing with Riley2 here! If it's foreign source income, it should be exempt. It may be formed under US law, but that doesn't change the income source from foreign source to US source, or else all those Americans filing 1116's for the foreign tax withheld on those dividends would be breaking the law.

LH2004 (talk|edits) said:

September 21, 2008
Section 853 permits the FTC to be claimed by shareholders for taxes paid by the RIC. That doesn't make RIC dividends foreign-source. There's a big difference.

No RIC dividends are short-term capital gain. Sec. 871(k)(2) formerly permitted a foreign shareholder to exclude a portion of the ordinary dividend based on the RIC's short-term capital gain; again, that doesn't make them foreign-source. As far as I know, that provision has sunsetted out of effectiveness.

Guya (talk|edits) said:

21 September 2008
There was indeed a brief honeymoon if I recall correctly when Rev Ruling 2005-31 permitted an RIC to divide up income but I believe this disappeared on December 31 2005, so this wedding was short-lived.

I agree with Riley2 that section 861 holds such funds to be US source & distributions taxable in full, potentially at the 30% rate. I know of no position on a MLTN basis that could work these days, so even disclosure on the 8275 would not assist in such cases.

The positive news is that US RICs are now bad news for taxpayers in the UK so few who come this direction & are well advised will be holding such investments in the future.

Riley2 (talk|edits) said:

22 September 2008
I think the 871(k)(2) exemption for RIC short-term capital gain distributions will still work for 2007; however, this law will sunset in 2008.

Esctan (talk|edits) said:

22 September 2008
Thank you so much for all your input. Will check out Sec 861 & 871. I am comfortable with the position that Short or Long Term Capital Gain are exempt to the NR. I think Riley2 is correct in that there is no proportionate allocation to exempt foreign div in mutual funds. I just think as NR are not allowed foreign tax credit on their foreign dividend, NR should be able to proportionally exclude this foreign div. from Mutual funds.

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