A regulated investment company or mutual fund company, as it is commonly known, is an investment company that is authorized to pass the dividends, capital gains and interests that is earned on the investment to its clients. Regulated investment is done mainly to avoid any double taxing for the investment distributions.
The regulated investment is also applicable to Real Estate Investment trusts and the authority is established by the IRS Regulation M. The regulated investment allows taxation at the individual levels and is a very useful method to avoid double taxation for the distributions of the investment. This is also called the conduit theory of investment.
Double taxation is called the taxation of the same earnings at two levels. One common example of double taxation is the taxation of earnings at corporate level and then again at the dividend level of shareholders.
Another example of double taxation is the taxation of foreign investments in a country that holds the origin and then again upon the repatriation, even that many countries of the world have signed agreements to prevent this type of double taxation.
There are some criteria specified that the regulation companies must meet. 90% minimum distribution of dividends and interests received from the investment and 90% distribution of the capital gain income are some of the criteria that a regulated investment company must satisfy. If a regulated investment company needs to avoid 4% excise tax then it has to pay out the 98% of its investment income and capital gains.
Excise tax is a Federal or state tax that is imposed on the distribution and manufacture of certain consumer goods that can be termed as non-essential. Environmental taxes, fuel taxes and communications taxes are some of the typical examples of excise taxes.
More popularly known as the mutual funds, the regulated investment companies can eliminate the corporate level tax by attaining corporate level deductions for the dividends paid by the regulated investment companies. The dividends paid deductions can be disallowed in the cases of preferential dividend provided by the section 562 (c) codes. This report mainly focuses on the applicability of the preferential dividends disallowance to the regulated investment companies. The report typically reviews the legislative history of the preferential dividends prohibition along with focusing on its applicability on the regulated investment companies. The report also discusses the details on the prohibition of the preferential dividends to a regulated investment company with multiple classes of stocks.
Last Updated on : 22th July 2013