[Code of Federal Regulations]
[Title 26, Volume 18, Parts 500 to 599]
[Revised as of April 1, 2000]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR517.2]
[Page 114-116]
TITLE 26--INTERNAL REVENUE
CHAPTER 1--INTERNAL REVENUE SERVICE DEPARTMENT OF THE TREASURY
(Continued)
PART 517--PAKISTAN--Table of Contents
Subpart--Withholding of Tax
Sec. 517.2 Dividends paid by, or to, a Pakistan company.
(a) Exemption from, or reduction in rate of, United States tax--(1)
Dividends paid by a foreign company managed and controlled in Pakistan.
Dividends which are paid by a foreign company whose business is managed
and controlled in Pakistan and are received in a taxable year beginning
on or after January 1, 1959, by a recipient who is not a citizen or
resident or corporation of the United States are exempt from United
States tax under the provisions of Article VII(1) of the convention.
(2) Dividends paid to a Pakistan parent company. The rate of United
States tax imposed upon dividends paid by a domestic corporation and
received from sources within the United States in a taxable year
beginning on or after January 1, 1959, by a Pakistan company
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shall not exceed 15 percent under the provisions of Article VI(1) of the
convention if (i) the Pakistan company does not have a permanent
establishment in the United States at any time during the taxable year
in which the dividend is received and (ii) the Pakistan company owns, at
the time the dividend is paid, shares of stock carrying more than 50
percent of the voting power of the domestic corporation. For the
purposes of this subparagraph, the term ``Pakistan company'' means a
company, as defined in Article II(1)(f) of the convention.
(b) Withholding of tax from dividends--(1) Exemption from
withholding. No withholding of United States tax is required in the case
of dividends paid by a foreign company whose business is managed and
controlled in Pakistan if, in accordance with paragraph (a)(1) of this
section, the dividends are exempt from United States tax.
(2) Withholding of tax at rate of 15 percent from dividends paid to
a Pakistan parent company--(i) Notification by letter. To secure
withholding of United States tax on or after January 1, 1959, at the
rate of 15 percent in the case of dividends entitled to the reduced rate
in accordance with paragraph (a)(2) of this section, the Pakistan
company shall notify the withholding agent by letter in duplicate that
the dividends are subject to the reduced rate of United States tax under
the provisions of Article VI(1) of the convention. The letter of
notification shall be signed by an officer of the company and shall show
the name and address of the corporation paying the dividends, the name
and address of the Pakistan company receiving the dividends, and the
official title of the officer signing the letter. The letter shall
contain a statement that (a) the owner of the dividends is a Pakistan
company, (b) the owner at no time during the current taxable year had a
permanent establishment in the United States, and (c) the Pakistan
company owns shares of stock carrying more than 50 percent of the voting
power of the domestic corporation paying the dividends. The letter shall
also indicate the dates on which the current taxable year of the
taxpayer begins and ends.
(ii) Use of letter for release of excess tax. If the letter of
notification is also to be used as authorization for the release,
pursuant to Sec. 517.7(a)(2), of excess tax withheld from dividends, it
shall also contain a statement that (a) at the time when the dividends
were paid from which the excess tax was withheld, the owner was a
Pakistan company, (b) the owner at no time during the taxable year in
which the dividends were received had a permanent establishment in the
United States, and (c) the Pakistan company owned, at the time when the
dividends were paid, shares of stock carrying more than 50 percent of
the voting power of the domestic corporation paying the dividends. The
dates of the beginning and ending of the taxable year of the taxpayer in
which the dividends were received shall also be indicated.
(iii) Manner of filing letter. The letter of notification, which
shall constitute authorization for withholding of tax at the reduced
rate of 15 percent, shall be filed with the withholding agent for each
successive 3-calendar-year period during which the dividends are paid.
For this purpose, the first of such periods shall commence with the
beginning of the calendar year in which the dividends are first paid on
or after January 1, 1959. Each letter filed with any withholding agent
shall be filed not later than 20 days preceding the date of the first
payment within each successive period, or, if that is not possible
because of special circumstances, as soon as possible after such first
payment. Once a letter of notification has been filed in respect of any
3-calendar-year period, no additional letter need be filed in respect
thereto unless the Commissioner of Internal Revenue notifies the
withholding agent that an additional letter shall be filed by the
taxpayer. If, after filing a letter of notification, the Pakistan
company ceases to be eligible for the reduction in rate of United States
tax granted by Article VI(1) of the convention, it shall promptly notify
the withholding agent by letter in duplicate. When any change occurs in
the ownership of the shares of stock as recorded in the books of record,
the reduction in the rate of withholding of United States tax shall no
longer apply unless the
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new owner of record is entitled to and does properly file a letter of
notification with the withholding agent.
(iv) Disposition of letter. Each letter of notification, or the
duplicate thereof, shall be forwarded immediately by the withholding
agent to the Director of International Operations, Internal Revenue
Service, Washington 25, D.C.
(3) Dividends paid to Pakistan company where degree of stock
ownership is uncertain--(i) Request for determination in respect of
future payments. If a Pakistan company anticipates the receipt of
dividends from a domestic corporation and the relationship existing
between the Pakistan company and the domestic corporation is such as to
render uncertain whether, by reason of the requirement as to stock
ownership, the reduction in rate of United States tax granted by Article
VI(1) of the convention will apply to such dividends, the Pakistan
company shall not undertake to file the letter of notification
prescribed in subparagraph (2)(i) of this paragraph unless it has, prior
to such filing, applied for and received from the Commissioner of
Internal Revenue, Washington 25, D.C., a determination that it owns
shares of stock carrying more than 50 percent of the voting power of the
domestic corporation. The application for the determination shall
contain a full statement of all the facts pertinent to such a
determination.
(ii) Notification of determination. As soon as practicable after the
application has been filed, the Commissioner of Internal Revenue will
determine whether the Pakistan company owns shares of stock carrying
sufficient voting power of the domestic corporation to permit the
Pakistan company to claim the benefit of Article VI(1) of the convention
in the case of such dividends and shall notify the Pakistan company of
his determination. The Pakistan company shall thereafter file with the
withholding agent a copy of the Commissioner's letter of notification.
(iii) Securing reduced rate of withholding. If the determination of
the Commissioner of Internal Revenue is that the Pakistan company does
own shares of stock carrying more than 50 percent of the voting power of
the domestic corporation, the Pakistan company may thereafter, if
otherwise qualified, secure the reduced rate of withholding of United
States tax by filing a letter of notification in accordance with
subparagraph (2) of this paragraph.
(iv) Period during which determination is applicable. A
determination by the Commissioner of Internal Revenue that a Pakistan
company does own shares of stock carrying sufficient voting power of the
domestic corporation to permit the Pakistan company to claim the benefit
of Article VI(1) of the convention will apply until such time as the
stock ownership of the domestic corporation has changed to the extent
that, because of such change, dividends to be received from the domestic
corporation by the Pakistan company no longer qualify for the reduced
rate of United States tax under Article VI(1) of the convention. If such
change in stock ownership occurs, the Pakistan company shall promptly
notify both the Commissioner of Internal Revenue and the withholding
agent of the then existing facts with respect to such stock ownership.
(v) Request for determination in respect of past payments. If a
Pakistan company has received on or after January 1, 1959, dividends
from a domestic corporation and the relationship existing between the
Pakistan company and the domestic corporation was at the time the
dividends were paid, such as to render uncertain whether, by reason of
the requirement as to stock ownership, the dividends qualified for the
reduction in rate of United States tax granted by Article VI(1) of the
convention, the Pakistan company shall apply to the Commissioner of
Internal Revenue, Washington 25, D.C., for a determination as to whether
the Pakistan company owned, at the time the dividends were paid, shares
of stock carrying sufficient voting power of the domestic corporation.
If the Commissioner's determination is that at such time the stock
ownership was such as to permit the application of the reduced rate of
United States tax granted by Article VI(1) of the convention, his letter
of notification may, subject to the provisions of Sec. 517.7(a)(2),
authorize the release of excess tax withheld from such dividends.
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