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Are there any tax implications or withholding considerations for foreign or institutional holders of the preferred and trust preferred securities that could affect net returns?

Created August 06, 2025 at 07:49 PM

Short answer:

Yes – the cash dividend on the 6.375 % Non‑Cumulative Monthly‑Income Preferred Stock and the monthly distribution on the Trust Preferred Securities are subject to U.S. tax rules that can reduce the amount foreign‑ or institutional investors actually receive. The principal “withholding” issues are:

Investor type	What is likely withheld / taxed	How it can affect the net cash received
Foreign (non‑U.S.) individuals	30 % statutory FDAP (Fixed‑or‑Determinable, Annual or Periodical) withholding on U.S. cash dividends unless a reduced treaty rate is claimed (e.g., many treaties lower the rate to 15 % or 0 %).	Net dividend = $0.1328 × (1 – withholding rate). A 30 % rate cuts the payment to ≈ $0.093 per share; a 15 % treaty rate leaves ≈ $0.113 per share.
Foreign (non‑U.S.) institutions / banks	Same 30 % FDAP rate, but many foreign banks can claim a 0 % treaty rate (or a reduced rate) by providing a valid Form W‑8BEN‑E. If the treaty rate is 0 %, no U.S. withholding is required.	If the treaty rate is 0 %, the full $0.1328 per share is received. If the treaty rate is 15 %, the same 15 % reduction applies as for individuals.
U.S. institutional investors (e.g., mutual funds, pension plans, REITs)	No statutory withholding on cash dividends, but the dividend is taxed as ordinary U.S. corporate‑level income (i.e., ordinary‑income tax rates for the institution). The dividend is not “qualified” because it is paid on non‑cumulative preferred stock, so the institution cannot use the lower qualified‑dividend rate.	The institution records the dividend as ordinary income on its books; the tax impact depends on the institution’s effective tax rate (often 21 % for corporations, but may be lower for tax‑exempt entities).
U.S. individuals	No withholding, but the dividend is taxed at the ordinary‑income rate (not the qualified‑dividend rate) because preferred‑stock dividends are generally treated as non‑qualified. The rate can be up to 37 % for high‑income taxpayers.	Net cash = $0.1328 × (1 – marginal tax rate). For a 24 % marginal rate, net ≈ $0.101 per share.

1. What the news actually tells us

Preferred‑stock dividend: $0.132813 per share of the 6.375 % Non‑Cumulative Monthly‑Income Preferred Stock (2003 Series A). Payable September 2 2025 to holders of record August 15 2025.
Trust‑Preferred distribution: The press release mentions a “monthly distribution” on the outstanding Trust Preferred Securities, but does not give the exact amount. Trust‑Preferred securities are generally treated as interest (debt) for tax purposes, not as qualified dividends.

Because the announcement is a cash dividend (for the preferred shares) and a cash distribution (for the trust‑preferred securities), the tax treatment follows the standard U.S. rules for cash dividends and interest payments.

2. Key U.S. tax rules that affect foreign and institutional holders

2.1 Foreign‑person withholding (FDAP)

Statutory rate: 30 % on U.S. cash dividends unless a tax treaty provides a lower rate.
Form W‑8BEN (individuals) or W‑8BEN‑E (entities) must be on file with the paying broker/agent to claim the treaty rate. Without a valid form, the 30 % default applies.
Backup withholding (up to 24 %) can be triggered if the foreign holder fails to provide a correct taxpayer identification number (TIN) or if the IRS notifies the payer of “incorrect payee information.” This is separate from the FDAP rate.

2.2 Trust‑Preferred securities (interest‑like treatment)

The IRS treats most trust‑preferred securities as interest (i.e., a debt instrument). Interest paid to a foreign person is also subject to the 30 % FDAP withholding unless a treaty reduces it.
Some trusts may be “grantor” trusts that pass the interest through to the grantor; the grantor’s residency then determines the withholding. The press release does not specify, so the safe‑harbor assumption is that the distribution is subject to the same FDAP rules as a dividend.

2.3 Institutional (U.S.) investors

Corporations, mutual funds, pension plans, REITs receive the dividend without any mandatory withholding. The dividend is taxed at the ordinary corporate rate (21 % for a typical C‑corp) or at the entity’s specific tax status (e.g., tax‑exempt, 0 %).
Because the preferred‑stock dividend is non‑cumulative and non‑qualified, the “qualified‑dividend” 20 % rate does not apply. The dividend is ordinary income for the corporation.

2.4 State and local taxes

U.S. individuals may also owe state income tax on the dividend, typically at rates from 0 % to 13 % depending on the state. Institutional investors may have state filing obligations, but many large institutions are exempt from state tax on dividend income received from other states.

2.5 Foreign‑tax credit (FTC)

Foreign investors who have U.S. tax withheld can often claim a foreign‑tax credit in their home country for the amount paid to the IRS, reducing the net impact on their overall tax burden. The credit is only available if the home jurisdiction allows it and if the investor can document the U.S. tax paid.

3. How these rules translate into net returns for each holder type

Holder	Gross cash per share	Typical withholding / tax	Net cash per share (illustrative)
Foreign individual (no treaty)	$0.1328	30 % FDAP → $0.0394 withheld	$0.0934
Foreign individual (15 % treaty)	$0.1328	15 % → $0.0199 withheld	$0.1129
Foreign bank (0 % treaty)	$0.1328	0 % → no withholding	$0.1328
U.S. individual (24 % marginal)	$0.1328	Ordinary‑income tax 24 % → $0.0319	$0.1009
U.S. corporation (21 % rate)	$0.1328	Ordinary‑income tax 21 % → $0.0279	$0.1049
Tax‑exempt institution (0 % rate)	$0.1328	No tax	$0.1328

Numbers are rounded; actual tax rates vary by taxpayer and jurisdiction.

For the trust‑preferred distribution, the same percentages apply, but the payment is treated as interest rather than dividend. Interest is generally tax‑deductible for the payer (Popular, Inc.) and ordinary‑income for the recipient, so the same withholding and tax treatment logic holds.

4. Practical steps for investors to minimize the impact on net returns

Foreign individuals & institutions
- Submit a valid Form W‑8BEN (or W‑8BEN‑E) to Popular’s transfer agent or broker before the record date (August 15 2025).
- Verify whether your country has a tax treaty with the U.S. and, if so, claim the reduced treaty rate on the form.
- Keep a copy of the IRS withholding statement (Form 1042‑S) for the dividend; you may be able to claim a foreign‑tax credit in your home country.
U.S. institutional investors
- Ensure the dividend is recorded as ordinary income on the entity’s books.
- If the entity is a tax‑exempt organization, confirm that the dividend qualifies for exemption (most qualified‑dividend rules do not apply, but interest‑like trust‑preferred payments are usually exempt for tax‑exempt entities).
- Review any state‑tax nexus that could create a filing requirement in a state where the entity does business.
U.S. individual investors
- The dividend is non‑qualified; it will be taxed at your ordinary marginal rate.
- If you are in a low‑income bracket (e.g., 10 % or 12 % marginal), the net impact is modest. High‑income taxpayers (35 %–37 %) will see a larger reduction.
- Consider tax‑loss harvesting or other portfolio strategies to offset the ordinary‑income tax hit.
All investors
- Track the record date (Aug 15 2025) and the payment date (Sep 2 2025). If you acquire shares after the record date, you will not be eligible for the dividend/distribution.
- Review the trust‑preferred security’s indenture to confirm whether the distribution is classified as “interest” (subject to FDAP) or “dividend.” The classification can affect the withholding rate for foreign holders.
- Consult a tax professional familiar with cross‑border dividend and interest taxation, especially if you have a complex corporate structure or are subject to multiple tax jurisdictions.

5. Bottom line

Foreign holders can see their cash dividend reduced by 30 % (or a treaty‑reduced rate) unless they properly file a W‑8 to claim a lower treaty rate.
Institutional U.S. holders face ordinary‑income tax at the corporate level (typically 21 %) but no withholding.
U.S. individuals pay ordinary‑income tax on the dividend (not the lower qualified‑dividend rate) and may also owe state tax.
The trust‑preferred distribution is taxed similarly to the preferred‑stock dividend, but it is generally treated as interest for tax purposes, which can trigger the same FDAP withholding for foreign recipients.

Because these taxes and withholding rules directly cut the cash received, they do affect net returns on both the preferred stock dividend and the trust‑preferred distribution. The only way to mitigate the impact is to ensure the correct tax forms are on file, to apply any treaty benefits, and to plan for the ordinary‑income tax liability in your overall portfolio strategy.