When Is a Statutory Benefit a ‘Treaty Benefit’? When the IRS Says So!

Since Section 1(h)(11) was enacted as part of the Jobs and Growth Tax Relief Reconciliation Act of 2003, questions have been raised on exactly how to interpret the section’s legislative history. Under this provision, a dividend received by a U.S. individual taxpayer (directly or through a pass-through entity) from a domestic corporation or a “qualified foreign corporation” (QFC) is subject to a maximum U.S. federal income tax rate of 15%.

Recently, based on a controversial interpretation of the limitation on benefits provision in the U.S-Cyprus Income Tax Treaty, the IRS has begun to challenge whether dividends received by U.S. shareholders from some Cyprus corporations are eligible for qualified dividend treatment. The problem is that the Treaty as currently drafted simply does not support the specific positions that the IRS is taking in its challenges.

In a recent article in the Journal of Taxation, I examine how, almost 10 years after the provision was enacted, the IRS has added a gloss on its interpretation of the legislative history of Section 1(h)(11).

Florida taxpayers receiving dividends from Cyprus corporations may be impacted by the IRS’ position.

To read the full article, please click here.