Academic journal article Journal of Accountancy

Finance Sub Treated as Conduit

Academic journal article Journal of Accountancy

Finance Sub Treated as Conduit

Article excerpt

In a significant extension of revenue ruling 84-152, the IRS held in a letter ruling that a foreign-owned offshore finance subsidiary, established in a worldwide financial center, constitutes a conduit for U.S. withholding tax purposes. Interest paid by a U.S. subsidiary to the finance subsidiary, heretofore exempt by treaty, is now subject to U.S. withholding tax.

Revenue ruling 84-152 had involved loans through the intermediary finance subsidiary located in a treaty country. When its U.S. subsidiary needed working capital, the foreign parent loaned the funds to its finance subsidiary, which in turn reloaned the same amount to the taxpayer. The IRS held that interest paid by the taxpayer to the finance subsidiary was to be treated as if actually paid to the foreign parent, reasoning that the subsidiary was a conduit because it did not have "dominion and control" over the interest income.

In letter ruling 9133004, a technical advice, the finance subsidiary obtained funds from the foreign parent via a capital contribution and from proceeds derived from the sale of debentures. On the same day, it reloaned all these amounts to the taxpayer. …

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