USA Law and Practice Contributed by: Stelios G Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins LLP
4. Tax Considerations 4.1 Withholding Tax
IRS Form W-8BEN-E (or, if an individual, IRS Form W-8BEN). A non-US lender that is an intermediary and is not the beneficial owner of interest must generally submit a completed IRS Form W-8IMY, accompanied by documents from beneficial owners or other attach - ments. If interest paid to a non-US lender is effectively con - nected with such lender’s trade or business in the United States, such interest will not be subject to US federal withholding if such lender submits a complet - ed IRS Form W-8ECI, but will generally be subject to net income tax in the United States and, for foreign corporations, branch profits taxes. Other exemptions may be available for foreign govern - ments or governmental entities assuming they provide the applicable completed IRS Form W-8EXP. Withholding taxes may also apply upon: (i) payment to a US person that does not demonstrate an exemp - tion by providing an applicable completed IRS Form W-9, (ii) payment of US source interest and certain other amounts to entities treated as “Foreign Financial Institutions” or certain “Non-Financial Foreign Enti - ties” not eligible for an exemption from FATCA with - holding tax, and (iii) payment of various fees (such as letter of credit fees), modifications to debt obligations, and various adjustments on debt obligations convert - ible into stock. Payments under a guarantee are generally similarly treated, with the source of payments for US federal income tax purposes generally determined based on residence of the borrower. If the lender is receiving security proceeds, such transaction may generally be treated as a payment on the loan. Under certain cir - cumstances, the lender may be treated as the owner of the foreclosed property, resulting in adverse tax consequences (especially cases of US real property held by a foreign lender). 4.3 Tax Concerns for Foreign Lenders Continuous and regular lending to US borrowers may result in the US government considering the lender as engaged in US trade or business, requiring the lender to file a US tax return and pay income taxes on income attributable to such trade or business. Any activities
Payments by US issuers or borrowers to US hold- ers or lenders are generally not subject to withhold - ing taxes under federal law. Backup withholding may apply to payments to US holders or lenders if they do not furnish a valid IRS Form W-9, as discussed in 4.2 Other Taxes, Duties, Charges or Tax Considerations . 4.2 Other Taxes, Duties, Charges or Tax Considerations The US federal government generally imposes a 30% withholding tax on interest paid to non-US lenders on a debt obligation of a US person (and certain non-US persons engaged in trade or business in the United States). For this purpose, payments with respect to any original issue discount, if not considered less than de minimis, are also treated as interest income and subject to such withholding tax. If a lender is qualified for the benefits of an applicable double taxation treaty between the United States and the lender’s country of residence, the withholding tax may be reduced or eliminated. Alternatively, a non-US lender may qualify for exemp - tion under the “portfolio interest exemption” (PIE). To qualify, the lender must not (i) be a controlled foreign corporation related to the borrower, (ii) be a bank receiving interest on an extension of credit entered into in the ordinary course of its trade or business or (iii) own (directly, indirectly or by attribution) equity representing 10% or more of the borrower’s total com - bined voting power of all voting stock (or, if the bor - rower is a partnership, 10% or more of its capital or profits interest). The PIE is only available for debt in “registered form” for US federal income tax purposes, and does not apply to certain contingent interest, such as interest determined by reference to any receipts, sales, cash flow, income or profits of, or the fluctuation in value of property owned by, or dividends, distribu - tions or similar payments by, the borrower or a related person. To claim an exemption or reduction under an appli - cable double taxation treaty or the PIE, the beneficial owner of interest must generally submit a completed
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