Off-shore investments by tax-exempts.

• Author: Kalick, Laura
• Position: Brief Article

A provision on deemed and actual dividends paid to a U.S. tax-exempt entity by a foreign subsidiary is part of the Tax Simplification and Technical Corrections Act of 1993 passed by the House Ways and Means Committee last year. If enacted, such a provision could make it more costly for tax-exempt entities to gain access to foreign investments and insurance markets.

Under Sec. 512(b)(1) , unrelated business taxable income (UBTI) generally excludes dividend income. While the treatment of subpart F income earned by an exempt organization's foreign subsidiary is not clear, several favorable letter rulings have been issued to exempt entities that owned shares in offshore insurance companies. Those rulings conclude that, since dividends would not be UBTI, dividends from foreign companies should not be UBTI.

The Ways and Means Committ ee hcld hearings on a number of miscellaneous revenue proposals, including one that would treat certain deemed and actual distributions from a 10%-or-more-owned foreign corporation to an exempt entity as UBTI. Under the proposal, the income earned through the foreign corporation would be UBTI if it would be taxable had it been earned...