The IRS has announced in Notice 2024-11 that the status of several U.S. foreign country tax treaties has recently changed, and this may affect the tax treatment of dividend payments received by U.S. individuals from foreign companies.
Section 1 of the income tax code provides graduated rates for individuals’ taxable income, which increase progressively up to a maximum of 37%. Certain types of income are eligible for a lower tax rate; among these are net capital gains, which according to §1(h)(11)(A) & (B) include qualified dividend income from certain foreign corporations.
Dividends from foreign corporations may be eligible for this favorable tax treatment if the payer corporation can take advantage of a tax treaty that the Treasury Secretary determines is “comprehensive” and “satisfactory” as stated in §1(h)(11)(C)(i)(II). The U.S. Department of the Treasury maintains and publishes a list of foreign tax treaties that meet these requirements.
Taxpayers and practitioners should be aware that removal of a treaty from this list means that the reduced tax rate for certain capital gains (a maximum of 20% for most individuals) is generally no longer available for dividends from foreign corporations to which the given treaty is applicable, and that the change in applicable rate is retroactive for foreign dividends paid on or after the effective dates. Two income tax treaties have recently been removed from this list (Russia treaty effective January 1, 2023; Hungary treaty effective January 8, 2023).
In addition, the income tax treaty with Chile has been added to this list (effective December 19, 2023), thus making the reduced capital gains tax rate now potentially available for dividends paid by foreign corporations to which the Chile tax treaty is applicable.
If you have questions or need further assistance with international tax questions, please reach out to a professional at FORVIS.