Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 65-78

1965-1 C.B. 630

Sec. 894

IRS Headnote

In determining, for the purposes of Article VI(1) of the United States-United Kingdom Income Tax Convention, whether more than 25 percent of the gross income of a domestic corporation paying dividends is derived from interest and dividends (other than interest and dividends received from its own subsidiary corporations), the term `interest' does not include the corporation's distributive share of partnership income which represents interest which the partnership derives from loans made in the active conduct of a banking business.

A domestic corporation claiming that dividends paid by it come within the proviso of Article VI(1) must furnish the information required by section 507.2(b)(3) of T.D. 5532, C.B. 1946-2, 73 (former section 7.501(b), renumbered).

Full Text

Rev. Rul. 65-78

Advice has been requested whether the reduced rate of 5 percent provided by Article VI(1) of the United States-United Kingdom Income Tax Convention, T.D. 5569, C.B. 1947-2, 100, is applicable to dividends paid to a United Kingdom parent corporation by its United States subsidiary corporation where all of the income of the subsidiary corporation consists of its distributive share of profits from a domestic banking partnership of which it is a member.

Article VI(1) of the United States-United Kingdom Income Tax Convention provides that the rate of United States tax on dividends derived from a United States corporation by a resident of the United Kingdom who is subject to United Kingdom tax on such dividends and not engaged in trade or business in the United States shall not exceed 15 percent: Provided that such rate of tax shall not exceed 5 percent if such resident is a corporation controlling, directly or indirectly, at least 95 percent of the entire voting power in the corporation paying the dividend, and not more than 25 percent of the gross income of such paying corporation is derived from interest and dividends, other than interest and dividends received from its own subsidiary corporations. Such reduction of the rate to 5 percent shall not apply if the relationship of the two corporations has been arranged or is maintained primarily with the intention of securing such reduced rate.

The pertinent question concerns the proviso that the 5-percent rate is not available if more than 25 percent of the gross income of the paying corporation is derived from interest and dividends.

The purpose of the qualifications found in Article VI of the United Kingdom Convention as to the nature of the gross income of the subsidiary corporation was to exclude from the application of the 5-percent rate on dividends, such dividends paid by an investment corporation the stock of which was held by the parent. It was not intended to deny the benefit of the reduced rate with respect to dividends paid by a subsidiary corporation whose principal business is the making of loans. Therefore, it is held that, in determining whether more than 25 percent of the gross income of the paying corporation is derived from interest and dividends (other than interest and dividends received from its own subsidiary corporations), the term `interest' does not include the corporation's distributive share of partnership income which represents interest derived by a bank from loans made in the active conduct of a banking business.

Section 507.2(b)(3) of T.D. 5532 (former section 7.501(b), renumbered), C.B. 1946-2, 73, requires that any domestic corporation claiming that dividends paid by it are subject only to the 5-percent rate shall file with the Commissioner of Internal Revenue, the following information: (i) The date and place of its organization; (ii) the location of the management and control of the foreign corporation to which the dividend is paid or to be paid; (iii) the number of outstanding shares of stock of the domestic corporation having voting power and the voting power thereof; (iv) the person or persons beneficially owning such stock of the domestic corporation and their relationship to such foreign corporation; (v) the amount of gross income, by years, of the paying corporation for the 3-year period immediately preceding the taxable year in which the dividend is paid; (vi) the amount of interest and dividends, by years, included in the gross income of the domestic corporation and the amount of interest and dividends, by years, received by such corporation from its subsidiary corporations, if any; and (vii) the relationship between the domestic corporation and the foreign corporation to which it pays the dividend. A determination will then be made as to whether the dividends come within the proviso of Article VI(1) of the convention. The 5-percent rate will not apply, however, where the corporate relationship between the two corporations has been arranged or is maintained primarily for the purpose of securing the lower rate of tax.