Rev. Rul. 87-39

1987-1 C.B. 180, 1987-20 I.R.B. 8.

FOREIGN TAX CREDIT; URUGUAYAN LAW NO. 15.767

Published: May 18, 1987

SECTION 901. - TAXES OF FOREIGN COUNTRIES AND OF POSSESSIONS OF UNITED STATES

(Also Section 903; 1.903-1.)

  Foreign tax credit; Uruguayan Law No. 15.767. The Uruguayan withholding tax imposed under Law No. 15.767 on dividends and profits is not a creditable income tax under sections 901 or 903 of the Code.

ISSUE

  Is the Uruguayan withholding tax on dividends and profits that is imposed by Law No. 15.767 of September 13, 1985, a creditable tax under section 901 or 903 of the Internal Revenue Code of 1986?

FACTS

  Law No. 15.767 of September 13, 1985, published in the Uruguayan Official Gazette of September 24, 1985, page 755-A (effective October 4, 1985), amended article 2, Title 2 of the 1982 Consolidated Tax Law by adding a new letter D. The new law imposes a 30 percent tax, withheld at the source of payment, on Uruguayan source dividends and profits paid or credited to non-Uruguayan shareholders. However, the tax is imposed only if the country of the recipient's domicile allows the tax to be credited against the recipient's domestic income tax liability. The Uruguayan tax authorities require any

dividend recipient who claims to be exempt from the tax to present a translated certification from its country of domicile that the tax will not be creditable in that country.

LAW AND ANALYSIS

  Section 901 of the Code provides that a credit is allowed against United States income tax for the amount of any income, war profits, and excess profits taxes paid or accrued to any foreign country. Section 1.901-2(a)(3) of the Income Tax Regulations provides that a foreign levy is an income tax for this purpose only if its is a tax, and if the predominant character of that tax is an income tax in the United States sense. Section1.901-2(a)(3)(ii) provides that the predominant character of a foreign tax is that of an income tax in the United States sense only to the extent that liability for the tax is not dependent on the availability of a credit for the tax against income tax liability to another country. Section 1.901-2(c) provides that liability for foreign tax is dependent on the availability of a credit for the tax against income tax liability to another country to the extent that the foreign tax would not be imposed but for the availability of such a credit.

  Section 903 of the Code extends the credit available under section 901 to taxes paid in lieu of income taxes. Section 1.903- 1(a)(1) of the regulations provides that a foreign levy is a tax in lieu of an income tax only if it is a tax, and if it meets the 'substitution requirement' of section 1.903-1(b). Section 1.903- 1(b)(2) provides that a foreign tax meets the substitution requirement only to the extent that liability for the tax is not dependent on the availability of a credit for the tax against income tax liability to another country. Accordingly, if a foreign country imposes a withholding tax only if a credit for the tax is available from the recipient's country of domicile, the tax is not creditable under section 901 or 903.

HOLDING

  The Uruguayan withholding tax on dividends and profits imposed by Law No. 15.767 of September 13, 1985, is not a creditable tax under section 901 or 903 of the Code, since it is imposed only if a credit for the tax is available from the recipient's country of domicile. This ruling is the official certification by the Internal Revenue Service that the Uruguayan withholding tax on dividends and profits is not creditable in the United States. The United States shareholder must supply translations required by the Uruguayan authorities.

Rev. Rul. 87-39, 1987-1 C.B. 180, 1987-20 I.R.B. 8