USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
chartered banks from applying the same interest rate as a nationally chartered bank. Under New York law, with certain exceptions, charging interest in excess of 16% constitutes civil usury, and charging interest in excess of 25% constitutes crimi- nal usury. However, loans in excess of USD250,000 are exempt from the civil statute, but remain subject to the criminal statute. Loans in excess of USD2.5 mil- lion, which include nearly all broadly syndicated loans in the US, are exempt from both New York’s civil and criminal statutes. 3.11 Disclosure Requirements There are no rules or laws in the USA that prohibit certain disclosure of financial contracts, but in credit documentation there is traditionally a confidentiality section that prohibits the lenders from disclosing the nature of the financing other than in pre-agreed situ- ations. The US tax rules contain a complex withholding regime that imposes, in certain circumstances, a with- holding tax of up to 30% on payments of interest to non-US lenders. To encourage international lending to US borrowers, however, the rules contain various exemptions from this withholding tax. Under current law, the expectation is that lenders to a US obligor should generally be able to qualify for one or more of these exceptions, such that lenders are not subject to the withholding tax and obligors are not required to compensate lenders under a “gross up” provision in credit agreements. To benefit from these exemp- tions, however, lenders must provide certifications to borrowers or their agents, generally on tax forms pub- lished by the Internal Revenue Service (IRS), as dis- cussed below. Parties to credit agreements with US obligors should ensure that such forms are appropri- ately addressed in loan documentation and furnished in practice. This withholding tax regime may also apply to certain other payments and income arising from loans. If a loan is issued at a discount in excess of a de minimis 4. Tax 4.1 Withholding Tax
amount (original issue discount, or OID), this discount is treated as interest income when paid, subject to the withholding tax. Certain fees may also be treated as OID for this purpose. There are several exemptions from the withholding tax on interest. The most notable exemption availed by non-bank lenders is the portfolio interest exemp- tion. In the case of banks and other lenders that do not qualify for the portfolio interest exemption, US tax treaties may eliminate withholding or reduce the rate. Finally, if non-US banks lend from their branch in the United States (a “US trade or business”), the withhold- ing tax generally does not apply. To qualify for one of these exemptions, non-US lend- ers are generally required to provide a US tax form to the borrower or agent – usually an IRS Form W-8BEN- E (for treaty benefits or the portfolio interest exemp- tion) or IRS Form W-8ECI (if the interest is effectively connected with the non-US lender’s US trade or busi- ness). Additional certifications and forms are required in certain instances involving flow-through entities or intermediaries. Another withholding regime that may apply to certain payments of interest and OID is the “backup with- holding” regime, which generally applies to domes- tic payments (currently at a withholding rate of 24%) in circumstances where a US lender fails to provide certain information and certifications required for pur- poses of the US information reporting regime. Backup withholding is usually eliminated by the provision of an IRS Form W-9 and, if it is imposed, generally can be recovered in the form of a credit on the lender’s US tax return. Principal payments and proceeds from a sale or other disposition of debt instruments are not subject to US withholding tax (except to the extent that such pay- ments are treated as a payment of interest or OID). However, fee income that is not treated as OID may be subject to 30% withholding unless a treaty applies or the recipient is engaged in a US trade or business. The portfolio interest exemption may not apply to such fees because they may not be treated as interest for US tax purposes.
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