1998 International Tax Simplification and Investment Competitiveness Bills Introduced

Washington, DC, July 14, 1998 - Legislation to exempt from U.S. withholding tax dividends paid to foreign investors in certain bond funds has been introduced in both Houses of Congress as part of the bipartisan "International Tax Simplification for American Competitiveness Act of 1998" (the "1998 bill"), introduced as S. 2231 by Senators Hatch and Baucus and as H.R. 4173 by Representatives Houghton, Levin, Crane, Matsui, Johnson, Herger, English and Neal.

This proposal is similar to the provision in the President's 1998 Budget Proposal, but is not as broad as the Investment Competitiveness Act legislation introduced last year, which would have exempted from U.S. withholding tax dividends paid by all regulated investment companies ("RICs") to the extent attributable to interest income and short term capital gains.

The new legislation provides that dividends distributed by a U.S. fund to its foreign investors generally will be exempt from U.S. withholding tax so long as 95 percent or more of the fund's gross income is derived from "permitted assets," which are defined generally to include debt securities, certain debt-related instruments, cash, and stock in a RIC that also invests in permitted assets. Of particular importance to funds investing overseas, the 1998 bill expands upon the President's 1998 Budget Proposal, which limited a U.S. fund's investments to U.S. debt securities, cash, and "some" foreign bonds. Specifically, the 1998 bill provides that income derived from foreign bonds generally be exempt from U.S. withholding tax, so long as foreign tax (if any) with respect to the bonds is not reduced or eliminated by a treaty with the United States. Thus, under the 1998 bill, no limit is placed on the ability of U.S. funds to invest in foreign securities, such as Eurobonds, that are free from foreign tax pursuant to foreign law.

Finally, the new legislation expressly provides that U.S. fund shares owned by a foreign investor generally will not be treated as property within the United States for estate tax purposes, and hence will be exempt from U.S. estate tax, if at least 95 percent of the fund's gross income is derived from permitted assets.