USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
Finally, the Foreign Account Tax Compliance Act (FAT- CA) may impose a 30% US withholding tax on non- US banks and financial institutions (including hedge funds) that fail to comply with certain due diligence, reporting and withholding requirements. FATCA with- holding tax applies to payments of US-source interest and fees, without any exemptions for portfolio interest or treaty benefits. Following the guidance issued by the Internal Revenue Service (IRS) and US Depart- ment of the Treasury in 2018, FATCA no longer applies to payments of gross proceeds from a sale or other disposition of debt instruments of US obligors. In the case of payments that are within FATCA’s purview, the recipient must generally certify its compliance with FATCA in order to avoid a punitive 30% withholding tax (on the same IRS W-8 forms described above). Many countries have entered into agreements with the USA to implement FATCA (Intergovernmental Agree- ments, or IGAs), which may result in modified require- ments that apply to financial institutions organised in such countries. 4.2 Other Taxes, Duties, Charges or Tax Considerations Under Section 956 of the Internal Revenue Code, if a foreign subsidiary of a US borrower that is a con- trolled foreign corporation (CFC) guarantees the debt of a US-related party (or if certain other types of credit support are provided, such as a pledge of the CFC’s assets or a pledge of more than two-thirds of the CFC’s voting stock), the CFC’s US shareholders could be subject to immediate US tax on a deemed dividend from the CFC. Following regulatory changes published by the US Treasury and the IRS in 2019, US borrowers may obtain credit support from CFCs without incurring additional tax liability if certain conditions are met. However, despite these regulatory changes, the majority of loan documents today continue to maintain custom- ary Section 956 carve-outs. This excludes CFCs from the guaranty requirements and limits pledges of first- tier subsidiary CFC equity interests to less than 65%. Separately, non-US lenders should closely monitor their activities within the USA to determine whether such activities give rise to a US trade or business or a
permanent establishment within the USA. If so, they could be subject to US taxation on a net income basis. 4.3 Foreign Lenders or Non-Money Centre Bank Lenders The primary tax concerns that arise for non-US lend- ers to US obligors are those summarised in 4.1 With- holding Tax ; ie, withholding tax on interest, including FATCA withholding. To mitigate these concerns, it is important for non-US lenders and US obligors to ensure that appropriate tax forms are exchanged in order to establish any exemptions from these with- holding regimes. Although the US tax rules do not address non-money centre banks per se, the various regimes described in 4.1 Withholding Tax (including IRS tax forms, the portfolio interest exemption and FATCA) apply differ- ently and impose different requirements based on the particular circumstances and business activities of the lender. In the United States, secured financings typically require a collateral package consisting of substan- tially all assets of the borrowers and their subsidiar - ies, along with a pledge of the borrower’s equity inter- ests by its direct parent – with negotiated exceptions, which typically excludes assets with burdensome perfection requirements and/or where a pledge would lead to expensive or other negative consequences for the borrowers which outweigh the benefit to the lend- ers. Typical exclusions include: • leased and owned real property below an agreed threshold; • equity interests in certain non-guarantor subsidiar- ies; • contractual rights that cannot be pledged by law or contract (although proceeds thereof are generally included); • assets requiring third-party or government consent to pledge; • assets of de minimis value; 5. Guarantees and Security 5.1 Assets and Forms of Security
676 CHAMBERS.COM
Powered by FlippingBook