Proposed Conduit Financing Regulations
Here is a summary of the article:
The IRS has issued a proposed regulation that clarifies that the term person includes disregarded entities when they are involved in a conduit financing arrangement. The article goes through a fairly detailed analysis of the change and the type of transactions involved. He provides the following example, contained in the proposed regulation from the IRS, to show a simple scenario that would be affected by the change. The sole example contained in the Proposed Regulations involves, in effect, a back-to-back loan arrangement. FP, a foreign corporation organized in a jurisdiction that does not have an income tax treaty with the United States (e.g., the Cayman Islands), lends $1 million to DS, a corporation organized in the United States, in exchange for a note issued by DS. A year after making the original loan, FP assigns the DS note to FS, a wholly-owned foreign subsidiary of FP organized in a jurisdiction that has an income tax treaty with the United States (e.g., the Netherlands) in exchange for a note issued by FS. The DS-FS income tax treaty eliminates withholding tax on dividends, interest and royalties. FS is a disregarded entity under the check-the-box regulations. After receiving notice of the assignment, DS remits payments due under its note to FS. According to the example, because the term “person” includes a disregarded entity under the Proposed Regulations, FS is treated as a person and therefore may itself be an intermediate entity that is linked by financing transactions to other persons in a financing arrangement. The DS note held by FS and the FS note held by FP are financing transactions, and together constitute a financing arrangement. Therefore, under the example, the interest paid from DS to FS would not be eligible for the reduced withholding tax rates under the DS-FS income tax treaty, but rather would be subject to a 30 percent U.S. withholding tax.