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Financing U.S. investments after the Revenue Reconciliation Act of 1993.

Under the guise of a "business provision," the Revenue Reconciliation Act of 1993 (RRA) included a modification to the interest deferral mechanism known as earnings stripping that is intended to generate $400 million of additional revenue in combination with two other provisions targeting foreign investors.(1) These changes will require foreign investors and their tax practitioners to review current structures employed in financing their U.S. investments carefully and modify them accordingly.

This article will explore two of these provisions: (1) the amplification of the so-called earnings stripping rules of Sec. 163(j) and (2) the authority given the IRS in new Sec. 7701(1) to issue regulations recharacterizing multiple-party financing transactions that are deemed to have been arranged for the purpose of avoiding U.S. tax. The advent of these new provisions is a clear attempt by Congress to shut down otherwise viable cross-border financing arrangements when a taxpayer's intent in structuring a transaction, or the inevitable tax outcome of a transaction, is the avoidance of U.S. tax in some manner. The article will present a number of alternative choices available in coping with these provisions.

Amplification of the Earnings

Stripping Provision

* Brief overview of Sec. 163(j)

Before Sec. 163(j) was enacted, a foreign corporation faced little disincentive to fund the operations of its U.S. trade or business with infusions of debt. To the contrary, the existence of debt on its U.S. subsidiary's books would give rise to tax deductible interest payments, generally without limitation.(2) Additionally, the interest payments by the U.S. subsidiary to its foreign parent would potentially be partially or wholly exempt from the 30% gross basis tax if an income tax treaty were in force between the United States and the foreign parent's country of residence.(3) Infusions of capital, conversely, would provide the U.S. subsidiary with no such interest deductions, and the ultimate remittance of dividends to the foreign parent could never be wholly tax exempt.(4)

Of course, to completely understand the overall tax position of the foreign investor, consideration must be given to the foreign investor's home country tax treatment. For example, in a high tax rate jurisdiction that exempts dividends from taxation but imposes a full tax on interest, a debt structure that at first blush appears attractive when considering only the U.S. tax implications may ultimately be more costly to the foreign investor when adding in the home country tax cost. Nonetheless, this obvious tax advantage of debt over equity financing from a U.S. tax perspective, combined with the ability of foreign investors to interpose treaty country corporations into their corporate organizational structure, has given rise and continues to give rise to considerable conflict between the U.S. tax authorities and taxpayers regarding the proper characterization of such instruments.

Sec. 163(j) was enacted in 1989 as part of the Revenue Reconciliation Act of 1989 in an attempt to limit the extent to which a foreign company could reduce or "strip" the U.S. earnings of its U.S. subsidiary. Generally, Sec. 163(j) denies a current interest deduction for interest paid to tax-exempt related persons when the interest expense exceeds 50% of the payor's current year's adjusted taxable income.(5) The interest disallowed under this provision is carried over and may be deductible in future years. The earnings stripping provision applies only if the payor has net interest expense for such tax year and the corporation's ratio of debt to equity as of the close of the tax year exceeds 1.5 to 1.

A related person includes a member of any one of the enumerated relationships in Sec. 267(b), as well as a person or persons having a greater-than-50% interest in a partnership(s) as provided in Sec. 707(b)(1).(6) For this purpose, a related person also includes any foreign corporation that owns directly or indirectly more than 50% of the voting power or value of the outstanding stock at a U.S. subsidiary.(7) As applied in this context, interest paid by a U.S. subsidiary to its foreign parent (or other related person) is considered "tax exempt related person interest" if it is not subject to the 30% gross basis tax under either internal U.S. tax laws or an income tax treaty in force between the United States and the recipient's country of residence.(8) When a treaty merely reduced the amount of tax imposed on the interest paid or accrued by the U.S. subsidiary, rather than eliminating it in its entirety, the borrower's U.S. interest deduction is potentially limited to the extend of the treaty rate reduction. For example, interest paid to a related party located in Italy is subject to a reduced U.S. tax rate of 15% under the U.S.-Italy income tax treaty. In this case, one-half (i.e., the statutory rate of 30% less the 15% treaty rate) of the interest paid to a related Italian party would be considered tax-exempt for this purpose and, therefore, potentially subject to the earnings stripping rules.(9)

* The issue of guarantees

The earnings stripping provisions as originally enacted were intended to attack related person financing arrangements designed to erode the taxable earnings of a U.S. subsidiary, but fell short of eviscerating all related-party financing structures, such as those attempting to circumvent the "relationship" requirement by using a black door approach. For example, parent companies often guarantee the debt of their subsidiaries to reduce the cost of bank borrowing. While such guarantees were the subject of much debate, the 1989 Congress intentionally postponed enacting specific rule to deal with such arrangements.(10)

* RRA change to Sec. 163(j)

Congress rethrough its position concerning parent-guaranteed debt and took a new, more expansive view. The new focus embraced the concept of fungibility, while the interest expense relating to a loan secured on the credit of a foreign entity is properly considered to be the expense of the foreign entity. Accordingly, by 1993, Congress now equated the two alternative funding methods it had distinguished just four years earlier.(11) Congress now reasoned that, assuming a given creditor is willing to lend to a foreign parent-U.S. subsidiary group based on the parent's credit, the lender would be indifferent (exclusive of tax considerations) as to which member of the debtor group was legally considered the primary obligor with respect to a given obligation. Therefore, the transaction could be structure so that the same excessive level of debt and interest is owed directly by the U.S. subsidiary to the unrelated lender, thereby circumventing the application of Sec. 163(j).(12)

Hence, Sec. 163(j) was amended to treat all guarantees as giving rise to disqualified interest, provided that the guarantor is either exempt from income taxation under the Code or a foreign person.(13)

Under Sec. 163(j)(6)(D)(iii), the term "guarantee" includes "any arrangement under which a person (directly or indirectly through an entity or otherwise) assures, on a conditional or unconditional basis, the payment of another person's obligation under any indebtedness." The application of this new provision is even more aggressive when one considers Congress's intention in defining the term "guarantee" for this purpose.

The committee intends that the term [guarantee] be interpreted broadly enough to encompass any form of credit support. This includes a commitment to make a capital contribution to the debtor or otherwise maintain its financial viability. It includes an arrangement reflected in a "comfort letter," regardless of whether the arrangement gives rise to a legally enforceable obligation. If the guarantee is contingent upon the occurrence of an event, the provision would apply as if the event had occurred.(14)

By providing a virtually limitless threshold through "comfort letter" arrangements, Congress apparently envisioned the Treasury having a zero tolerance for any expression of willingness on behalf of a foreign entity to support a related party debtor, whether or not through a legally binding obligation.(15)

Two exceptions to the guarantor classification rule are provided. First, if the borrowing corporation owns a controlling interest in the guarantor, the guarantee is not considered "disqualified."(16) A controlling interest in a corporation for this purpose means a direct or indirect ownership of at least 80% of the vote and value of the guarantor's stock.(17) Second, in instances identified by regulations, a guarantee will not be disqualified if the Treasury views it as akin to a hypothetical effectively connected loan made by the foreign guarantor's U.S. trade or business.(18) However, Congress intended that the Treasury have broad discretion to limit this exception to cases in which tax avoidance is clearly lacking.(19)

The amendments to the earnings stripping rules are applicable with respect to interest paid or accrued in tax years beginning after Dec. 31, 1993.(20) Thus, financing structures that are outstanding as of the end of 1993 and that are supported by foreign related-party guarantees may have to be modified in order to avoid imposition of the earnings stripping deferral beginning next year. Additionally, interest paid or accrued on fixed-term loans on or before July 10, 1989 that was previously exempt under the grandfather provision of the original Sec. 163(j) is now subject to the earnings stripping provisions under these amendments.(21)

* Coping with the changes to Sec. 163(j)

Described below are a number of alternative approaches that foreign parents and their U.S. subsidiaries might consider in coping with the 1993 changes to Sec. 163(j). As a first step, a detailed calculation should be made of the potential interest deferral under Sec. 163(j); much concern has been expressed over the potential impact of Sec. 163(j), but when the calculation is performed, even taking into account the new guarantee provisions, the limitation does not apply in many cases. Other points to consider follow.

Global tax planning: Once the calculation is performed and determination is made that the U.S. subsidiary is subject to an interest deduction deferral under Sec. 163(j), consideration should be given to the impact of injecting capital and repaying the U.S. subsidiary's debt. A foreign corporation operating in a number of other high tax jurisdictions, as well as in the United States, may be able to make efficient tax use of interest charges in some other country.

Example: Parent P in country X maintains a profitable subsidiary in country Y, which allows interest expense to offset operating income with minimal restrictions and has an income tax treaty in force with the United States. Country Y either exempts dividends from tax or allows for a deemed paid foreign tax credit and YSub has excess limitation capacity. By shifting debt to YSub, which then uses the funds to capitalize US Sub, the dividends ultimately paid would be subject to a reduced rate of withholding and can be used by YSub to pay off its debt owed to P. From a global tax perspective, the group would have made efficient use of its funds.

Safe harbor debt-equity planning: The earnings stripping provisions are not imposed on a taxpayer in any year its debt-equity ratio does not exceed the statutory safe harbour ratio of 1.5 to 1 as of the last day of such year.(22) Hence, a foreign parent-U.S. subsidiary group can use this safe harbor in tax planning for a particular year. For example, when a new U.S. corporation purchases equipment to lease, it may initially prefer a high debt-equity ratio since it will likely generate losses without full use of its interest deductions. In later years, when existing leases turn over and the U.S. corporation is more profitable from a tax perspective, the corporation may prefer to reduce its debt-equity ratio, thereby claiming current interest deductions without limitation as well as using the carryover deductions from earlier tax years.

Meeting the 1.5 to 1 debt-equity sale harbor ratio may require only a small shift in a corporation's capital structure by year-end, when its actual ratio is close to the safe harbor threshold. For example, by shifting only 7% of a corporation's funding base from debt to capital, a 2 to 1 ratio is converted to 1.5 to 1 (i.e., 67% to 60%).

Adjusted taxable income planning: A corporation is subject to Sec. 163(j) only to the extent it generates excess interest expense in a given year.

"Excess interest expense" is generally the corporation's net interest expense in excess of 50% of the corporation's adjusted taxable income.(23) Thus, as adjusted taxable income increases, so too does the minimum threshold for imposition of the earnings stripping deferral. Adjusted taxable income may be increased without increasing overall taxable income through asset purchases entitled to accelerated cost recovery deductions, investments in U.S. corporations generating income in the form of dividends entitled to dividends-received deductions, and other similar items.

Exception to the guarantor classification rule: As described above, a guarantee will not be considered to give rise to disqualified interest if the guarantor is owned by the borrowing corporation. Thus, to the extent the U.S. debtor owns at least 80% of the vote and value of another corporation that is able to issue a guarantee,(24) this credit enhancement arrangement would be respected for earnings stripping purposes.(25) Additional, the guarantor does not have to be a corporation. For example, the U.S. debtor may own more than an 80% interest in a partnership venture with its parent, with the partnership issuing the guarantee on third-party financing. The committee reports offer no indication that regulations may seek to look through to the partners to determine whether a disqualified guarantee exists, although for purposes of determining whether interest paid or occrued to a partnership is disqualified, such determination is made at the partner level under Sec. 163(j)(5)(A).

Creating interest equivalents: Many transactions can be structured to produce the effects of a financing when, under general precepts of tax law, they are accorded alternative treatment.(26) If this same alternative treatment were to be respected for purposes of Sec. 163(j), taxpayers could theoretically avoid the imposition of the earnings stripping deferral. However, the Treasury reserved the question of what will be considered interest equivalents in promulgating its proposed regulations under Sec. 163(j).(27) Consequently, taxpayers

(1) The repeal of the portfolio debt exemption on contingenet interest and an anti-conduit financing rule. (2) Sec. 267(a)(3) and its regulations generally operate to defer the deduction of accrued interest expense owed to a related foreign person until the tax year when the actual payment is made. (3) Most U.S. income tax treaties contain an interest article reducting the rate on interest to 15% or less; 15 treaties generally reduce the rate of zero (Austria, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Luxembourg, the Netherlands, Norway, Poland, Sweden and the United Kingdom). (4) Dividends are subject to a tax of 5%-15% under most U.S. income tax treaties. (5) "Adjusted taxable income" is the corporation's taxable income the year, adjusted for various addition and subtractions, that roughly approximates preinterest net cash flow. See Sec. 163(j)(6)(A) and Prop. Regs. 1.163(j)-2(f). (6) Sec. 163(j)(4). (7) Sec. 267(b)(3) and (f)(1). (8) Sec. 163(j)(3)(A), as elaborated by Sec. 163(j)(5)(B). (9) For an example of the application of the earning stripping deferral mechanism, see Dionne and Throndson, "Highlights of the Proposed Earnings Stripping Regulations under Sec. 163(j)," 23 The Tax Adviser 53 (Jan. 1992). (10) See H. Rep. No. 101-386, 101st Cong., 1st Sess. 567 (1989) (hereinafter, the "1989 Conference Report"). (11) The two alternative structures are (1) a U.S. subsidiary borrows from an unrelated lender secured by a parent guarantee and (2) a foreign parent borrows directly from an unrelated lender and lends the funds to its subsidiary. (12) Committee on the Budget, U.S. Senate Reconciliation Submissions of the Instructed Committees Pursuant to the Concurrent Resolution on the Budget, 103d Cong., 1st Sess., S. Prt. 103-36, 372 (June 1993), at 312-313 (hereinafter, the "Senate Reports"). (13) Sec. 163(j)(6)(D)(i). The rule does not apply, however, if interest paid under the guaranteed debt is subject to the 30% "gross basis" tax. See Sec. 163(j)(3)(B)(ii). (14) Senate Report, at 317. (15) The concept of "comform letter" is reflected in other terms such as "letter of patronage" or "letter of awareness." (16) Sec. 163(j)(6)(D)(ii)(II). (17) Id. A controlling interest in any other entity means direct or indirect ownership of at least 80% of the profit and capital interests in the entity. (18) The rules governing whether a loan is considered effectively connected with a foreign corporation's U.S. trade or business are in Sec. 864(c) and Regs. Sec. 1.864-4. The concept here is that when the guarantee is akin to an effectively connected loan made by the foreign guarantor, the income would not be subject to a gross basis tax if paid directly to the guarantor, but rather to a net basis a tax under Sec. 882(a). (19) Senate Report, at 317. (20) RRA Section 13228(d). (21) The grandfather provision for debt issued on or before July 10, 1989 under former Sec. 163(j)(3)(B) was repealed. (22) Sec. 163(j)(2)(A)(ii). The terms "debt" and "equity" are defined in Prop. Regs. Sec. 1.163(j)-3(b) and (c), respectively. (23) "Adjusted taxable income" is defined in Sec. 163(j)(6)(A) as the taxpayer's taxable income computed without regard to its net interest expense, net operating loss deductions and cost recovery deductions such as depreciation, amortization or depletion. Prop. Regs. Sec. 1.163(j)-2(f) also requires adding back, among other items, charitable contributions carried over from prior years, tax-exempt interest income, dividends-received deductions and capital losses carried forward or back. Required subtractions include interest expense related to tax-exempt income, current year limited charitable contributions and current year net capital losses. (24) If a second tier subsidiary legally issued the guarantee, which in turn was backed by the guarantee of the parent, it is likely that the Service would view this as a conduit transaction and look through it to attack the parent guarantee. (25) Note that under Sec. 956(d) and Regs. Sec. 1.956-2(c), the guarantee of a debt instrument by a controlled foreign corporation (CFC) will be considered U.S. property held by such CFC. (26) Example include sale-leaseback transactions, asset-backed securitizations and derivative financial instruments. (27) Prop. Regs. Sec. 1.163(j)-2(e)(3). face the potential of future IRS attack on alternative transactions that represent financings, even though they may be treated otherwise under other U.S. tax provisions.

Treaty nondiscrimination arguments: Since it is evident that the impact of Sec. 163(j) will fall heavily on foreign-based multinational entities,(28) affected taxpayers may wish to consider whether the earnings stripping rules run counter to the nondiscrimination provisions of a relevant income tax treaty - specifically, in the context of the "interest deductibility" and the "capital ownership" provisions found in the more recent versions of nondiscrimination articles.(29) It should be noted that the committee reports express Congress's belief that the new guarantee provisions within Sec. 163(j) do not conflict with U.S. tax treaties.(30) Additionally, Congress made reference to the existence of other U.S. tax provisions under which foreign and domestic persons are not treated similarly, but which do not necessarily constitute discrimination.(31) Nevertheless, the legislative histories to the 1989 and 1993 Acts did not explicitly state Congress's intention that the provisions of Sec. 163(j) override treaties in the event a bona fide conflict does arise. Consequently, taxpayers may argue that the earnings stripping rules, especially the 1993 amendments, violate the nondiscrimination articles of some U.S. income tax treaties.

Back-to-back loans: Although it is clear that Congress intended that the Treasury be given broad authority to disallow interest in connection with back-to-back loans,(32) the Treasury reserved comment on the treatment of such devices in Prop. Regs. Sec. 1.163(j)-9. Rather, the preamble to the proposed regulations indicated that the Service's position on back-to-back loans is contained in various rulings.(33) Nevertheless, to the extent a taxpayer can demonstrate that the "complete" dominion and control test"(34) is met with respect to a back-to-back structure, it could present an interesting alternative for the taxpayer. Of course, back-to-back arrangements will now also fall under the specter of Sec. 7701(1), the focus of the remainder of this article.

Characterizing Multiple-Party Financing

Transactions as Conduit Arrangements

New Sec. 7701(1) provides the Treasury with the authority to prescribe regulations that would recharacterize any multiple-party financing transaction as a transaction directly among any two or more parties when it is determined that such recharacterization is appropriate to prevent tax avoidance. According to its legislative history, the purpose of Sec. 7701(1) is "to prevent unwarranted avoidance of tax through multiple-party financial engineering, as well as to provide a mechanism for issuing additional guidance to taxpayers entering into financial transactions."(35) For example, a taxpayer may engineer a financing structure that effectively shifts the lender from a country with no U.S. tax treaty to a country where a U.S. tax treaty provides for a reduced rate of withholding tax. Another structure may avoid Sec. 163(j) by effectively converting the interest recipient from a related person to an unrelated person. It is anticipated that the forthcoming Treasury regulations will apply the substance-over-form doctrine(36) to collapse multiple-party transactions into a recharacterized form that isolates the persons with ultimate economic interest.

The underlying principles of Sec. 7701(1) are based on a limited number of cases and rulings cited in its legislative history. In Aiken Industries, Inc.,(37) the Tax Court looked through an intermediary loan between the taxpayer and a foreign related party, resident in a treaty country. Because the foreign related party had a precisely matching obligation to another related party that was resident in a nontreaty country (i.e., an identical back-to-back loan), the court viewed the intermediary corporation as not having "complete dominion and control over the funds" and, consequently, did not grant treaty relief from withholding tax.

The Service expanded the scope of the conduit theory in 1984 by disregarding (in two revenue rulings) the intermediary financial transactions of corporations located in a country with a reduced treaty withholding rate. In Rev. Rul. 84-152,(38) a Swiss parent corporation owned 100% of both a Netherlands Antilles(39) corporation and a domestic corporation. The parent corporation loaned funds to the Netherlands Antilles corporation, which in turn loaned the funds to the U.S. corporation at a 1% markup. Without borrowing from the parent, the Netherlands Antilles corporation lacked sufficient funds to make the subsequent loan to the U.S. corporation. Relying on Aiken Industries, the Service held that the interest payments made by the U.S. corporation were "derived by" the parent and not the treaty country corporation. The Swiss parent corporation was viewed as having complete dominion and control over the interest and, consequently, a 5% withholding tax(40) was imposed on the interest payments made by the U.S. corporation.

Rev. Rul. 84-153(41) presented a similar fact pattern, but the Netherlands Antilles controlled foreign corporation, as intermediary, obtained proceeds by issuing bonds to foreign persons through public offerings(42) and loaned them to its U.S. sister corporation. Once again, the Service ruled that the Netherlands Antilles corporation failed to obtain complete dominion and control over the interest paid by the U.S. corporation and that it acted merely as a conduit for the passage of interest. The Service considered the interest payments to be derived by the foreign bondholders and, therefore, not exempt under the U.S.-Netherlands income tax treaty.

In an analysis independent from that of Aiken Industries, Rev. Rul. 87-89(43) presented three distinct situations to illustrate the U.S. withholding tax implications when an unrelated financial intermediary is interposed between two related parties as lender to one and borrower to the other. The thrust of Rev. Rul. 87-89 is to invoke the "complete dominion and control" doctrine over the interest payments when the intermediary would not have made or maintained the loans on the same terms without the corresponding borrowing. In the first situation, a foreign parent corporation deposited funds in a bank located in a different foreign country. Subsequently, the bank loaned funds to the domestic subsidiary of the foreign depositor. As there was presumptive evidence that the loan would not have been made or maintained on the same terms but for the deposit, the IRS held that the transaction should be recharacterized as a direct loan since the deposit and loan were dependent transactions "used as a device to disguise the substance of the transaction."(44) The two other situations reached similar outcomes, thus making the Service's position abundantly clear in the context of back-to-back arrangements when a loan is linked in some fashion to a deposit.

The IRS further expanded its application of the conduit theory in Letter Ruling (TAM) 9133004.(45) A Canadian parent corporation purchased debentures from, and made a capital contribution to, its Dutch finance subsidiary.(46) On the same day, the Dutch finance subsidiary made loans in the same amounts to its U.S. affiliate. The domestic affiliate paid interest to the Dutch subsidiary on its indebtedness, while the latter remitted funds to the Canadian parent in the form of dividends for essentially the same amounts in the same year the interest was received. The Service held that the Dutch finance subsidiary was no less of a conduit merely because payments to the parent were in the form of dividends rather than interest, consequently denying the benefits of the U.S.-Netherlands income tax treaty to Canadian recipient.(47) The mere fact that Congress cited this letter ruling in its legislative history to Sec. 7701(1) provides reason enough to believe that the Treasury's imminent regulations will be severely antitaxpayer, to say the least.

In enacting Sec. 7701(1), Congress recognized that these rulings appropriately ignore conduit entities and properly recharacterize the transactions described therein. However, Congress intended that the Treasury not be bound, in developing regulations under Sec. 7701(1), by the standards on which these rulings are based if the Treasury deems it necessary or appropriate to adopt other standards in order to properly recharacterize a financing transaction. Congress further intended that Sec. 7701(1) apply not only to back-to-back arrangements, but also to other financing transactions, such as multiple-party transactions involving debt guarantees or equity investments.(48)

The effective date of Sec. 7701(1) is Aug. 10, 1993 and is not accompanied by either a grandfather provision or a transition period. The Treasury anticipates releasing proposed regulations in early spring 1994. In light of the potentially far-reaching implications these anticipated regulations are likely to have, multinational corporations should carefully evaluate their possible impact on existing financial structures as well as future multiple-party financial transactions.

(28)See Senate Report, at 318. (29)See, e.g., U.S. Model Income Tax Treaty, Article 24, [double paragraph] 4 and 5. (30)Senate Report, at 318, citing 1989 Conference Report, at 569-570. See also Committee on Fiscal Affairs, OECD, Thin Capitalisation (1987). Note that the Service is likely to maintain a similar position and challenge such an argument on examination. (31) For example, the 1989 legislative history indicated that foreign persons are not subject to an unrelated business income tax (UBIT) provision (Sec. 512(b)(13)) that is applicable to U.S. persons. Additionally, Sec. 884 was introduced in 1986 to permit U.S. and foreign corporations to be taxed effectively the same under distinct taxing regimes. (32) 1989 Conference Report, at 419. (33) INTL-0870-89 (6/18/91). (34) This doctrine is embodied in cases and rulings discussed in the text accompanying footnotes 37 through 47. As a practical matter, the "dominion and control test" arguably may never be met in back-to-back loan arrangements. (35) WMCP: 103-11, 103d Cong., 1st Sess. (1993) (the "House Report"), at 292. (36) See, e.g., Gregory v. Helvering, 293 US 465 (1935)(14 AFTR 1191, 35-1 USTC [paragraph] 9043). (37) Aiken Industries, Inc., 56 TC 925 (1971), acq. on another issue, 1972-2 CB 1. (38) Rev. Rul. 84-152, 1984-2 CB 381. (39) As of the date of the ruling, Article VIII(1) of the U.S.-Netherlands income tax treaty provided a zero rate of withholding on payments of interest by a U.S. resident to a Netherlands Antilles resident. (40) Under the U.S.-Switzerland income tax treaty, Article VII(1). (41) Rev. Rul. 84-153, 1984-2 CB 383. (42) The Eurobond offering failed to meet the foreign-targeted requirements of the portfolio interest exception in Sec. 163(f)(2)(B) and, consequently, was routed through the Netherlands Antilles subsidiary with the intention of gaining a tax exemption through the treaty. (43) Rev. Rul. 87-89, 1987-2 CB 195. (44) Citing Gregory v. Helvering, note 36. (45) IRS Letter Ruling (TAM) 9133004 (5/3/91). (46) The Dutch finance subsidiary was not thinly capitalized and employed a controller and an experienced managing director. It also maintained a board of five directors, only one of whom was employed by the Canadian parent. (47) The Service did not apply the dominion and control standard to this case, which, if applied to the finance subsidiary's ability to declare a dividend, would have worked counter to the Service's argument. (48) Senate Report, at 372-373.
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Author:Tuckner, Todd
Publication:The Tax Adviser
Date:Feb 1, 1994
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