USA Law and Practice Contributed by: Bjorn Bjerke, Corey Reis and Joshua Kopel, A&O Shearman
are, or could be, equity for tax purposes so as to avoid the SPE becoming taxed as a corporation. 7.3 Withholding Taxes Payments based on US-source income to for - eign individuals and corporations are poten - tially subject to withholding tax. Interest paid or accrued by a typical securitisation SPE to a foreign person will – subject to the satisfaction of certain requirements relating to the investor’s US activities and the investor’s equity, or control relationship with the SPE and related persons – usually be exempt from withholding tax by virtue of falling within the “portfolio interest” exemption from withholding. In circumstances where that exemption does not apply, the withholding tax could still be reduced or eliminated by virtue of applicable income tax treaties. • In addition, the Foreign Account Tax Compli - ance Act (FATCA) imposes a withholding tax on certain payments (including interest in respect of debt instruments issued by a secu - ritisation SPE and gross proceeds from the sale, exchange or other disposition of such debt instruments) made to a foreign entity if the entity fails to satisfy certain disclosure and reporting rules. FATCA generally requires that: • in the case of a foreign financial institution (defined broadly to include a hedge fund, a private equity fund, a mutual fund, a securiti - sation vehicle or other investment vehicle), the entity must identify and provide informa - tion in respect of financial accounts with such entity held directly or indirectly by US persons and US-owned foreign entities; and • in the case of a non-financial foreign entity, the entity must identify and provide informa - tion in respect of substantial US owners of such entity.
Foreign entities located in jurisdictions that have entered into intergovernmental agreements with the USA in connection with FATCA may be sub - ject to special rules or requirements. 7.4 Other Taxes Another tax issue that arises in connection with the use of foreign SPE issuers that are treated as corporations for US federal tax purposes is whether the SPE is engaged in a US trade or business for US federal income tax purposes. If a foreign securitisation issuer were to be engaged in US trade or business for US federal income tax purposes, it would become subject to US federal income tax and potentially, also subject to state and local income tax. To avoid this outcome, foreign securitisation issuers tend to conduct their activities in accordance with detailed guidelines that aim to ensure that they are not engaged in loan origination or otherwise treated as conducting a lending or other financial business in the USA. 7.5 Obtaining Legal Opinions In a securitisation transaction it is common for tax counsel to provide an opinion addressing the tax treatment of the issued securities; in particu - lar, whether the offered notes would be treated as debt securities for US federal income tax pur - poses. The level of comfort is reflected in terms such as “will”, “should” and “more likely than not”, where “will” is the highest level of comfort and “should” still provides a high level of con - fidence but with a more than insignificant risk of a different conclusion. It is also common as part of the closing opinions for a securitisation to include an opinion that the securitisation entity would not be taxed as a corporation for federal tax purposes. The latter opinion is frequently also required in the case of certain amendments to the corporate documents.
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