A US Senator is working to end a dividend tax cut for investors who hold shares in companies based in lower tax rate jurisdictions such as Bermuda-based Tyco International Ltd., Cooper Industries Ltd. and Ingersoll-Rand Ltd.

The Wall Street Journal reported that Ranking member on the Senate Finance Committee Senator Max Baucus of Montana introduced legislation this month to close a loophole in The Jobs and Growth Tax Relief and Reconciliation Act of 2003.

That act was originally created to end so-called double taxation where income was taxed by the corporation and then again at the shareholder level when dividends were paid.

Under the Act, dividends are taxed at either 15 percent for upper income taxpayers, or 5 percent for lower income taxpayers. By 2008, this lower rate becomes zero and the whole provision currently is set to expire in 2009 although it may be extended.

Senator Baucus told the floor however that the definition of qualifying foreign companies in the Act is "overly broad" and may encompass companies in tax haven countries with little or no tax system.

"I believe we have found a significant and unintended loophole," he said.

Dividends from companies are considered eligible for the lower tax rate if the company is based in a US possession, or based in a country with which the US has a tax treaty, or has stock which is traded on a US stock exchange.

"Providing this special benefit for such companies simply because its stock is traded on a US exchange does not meet with the original intent of the legislative change.

"Our bill would shut down this loophole by modifying the "stock exchange" test to only allow this special rate for companies based in countries with a comprehensive income tax system. By doing this, we will address a current inequity between dividend-paying stocks and make sure that only stock of companies subject to tax at the corporate level enjoys this preferential rate," he said.

Senator Baucus told the floor that since the Taxation Subcommittee finding that corporations with little or no taxes at the entity level really receive an additional benefit from the current dividend tax break, his bill would deny the dividend cut to a company located in country without a comprehensive income-tax system, even if their shares are traded on a US exchange.

As such shareholders of such Bermuda-based companies as Tyco ? which moved its US headquarters here to reduce its corporate tax burden ? would lose the tax break.

Instead their dividends would be taxed at the shareholder's ordinary income-tax rate, which can be as high as 35 percent.

The success of the bill's passage has been hurt by the fact that no Republicans are backing it. However The Wall Street Journal reported that the bill is still significant because it shows that companies and their shareholders still face a risk when engaging in corporate inversions.

Bernard Kent, a partner at Pricewaterhouse Coopers LLP in Detroit told the Journal however that such a change in dividend taxation won't affect the nearly two-thirds of US shareholders, such as pension plans, who are tax exempt.

For this reason, he said "there shouldn't be a huge impact on the stock prices of the companies because the higher tax on the dividends will only be felt by a minority of investors" such as individual investors.