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IMPORTANT TAX UPDATE:
IRS SUBJECTS FOREIGN LENDERS TO U.S. TAX - BASED ON ITS U.S. AGENT’S ACTIVITIES
Recently the Internal Revenue Service (“IRS”) issued a Memorandum which held that interest paid by a US borrower to a foreign lender was subject to US tax even though the lender had no employees or office in the US. The basis for taxation was rather the loan origination activities of a US corporation with which the foreign lender had entered into an arm’s length arrangement but which was treated by the Service as a class of agent of the lender.
One of the bases on which the US imposes federal income tax on the income of a foreign corporation is if that income is “effectively connected” with the conduct of a US trade or business by the corporation. In such a case, the income is taxed on a net basis at the same US federal tax rates that apply to a US taxable person. In certain cases, relief from such taxation under US income tax treaties is available.
Recently the IRS issued a pronouncement, Advice Memorandum 2009-010, which bears on this subject, with particular relevance to foreign persons making loans into the US. In AM 2009-010, a foreign corporation entered into a services agreement with a US corporation, under which the latter regularly and continuously performed considerable loan origination activities, e.g., solicitation of customers, negotiation of contract terms and performance of credit analysis. The US corporation could not, however, conclude contracts on behalf of the foreign lender. For its origination services, the US corporation was paid an arm’s length fee by the foreign lender.
The IRS indicated that the US corporation acted as a form of agent of the foreign lender. It took the position that, by reason of the activities of that corporation, the foreign lender was engaged in a US trade or business. The Service then held that interest on the loans originated by the agent was “attributable” to the agent’s US office and was effectively connected with the lender’s US trade or business. The ultimate result is that the interest paid to the foreign lender would be subject to US federal income tax, since the country in which the foreign lender was organized did not have a bilateral income tax treaty with the US. ________________________________________________________________________________ We are pleased to announce that Charles E. Chromow has joined our firm as Senior Counsel. Mr. Chromow’s practice focuses on international and domestic taxation, including corporate and partnership issues and inbound and outbound investment transactions. He received an A. B. degree cum laude from Harvard College, a J.D. degree from Harvard law School and an L.L.M. in Taxation from the New York University School of Law. Prior to joining the firm, for almost ten years he was an Executive Director with Ernst & Young LLP. Prior thereto, Mr. Chromow was a partner in the law firm of Werner & Kennedy, where he managed the firm’s tax practice, and a Vice President responsible for the domestic tax planning group at The Chase Manhattan Bank. He is a member of the New York State Bar Association (Tax Section) and the New York City Bar Association.
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