USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
5. Guarantees and Security 5.1 Assets and Forms of Security
Payments under a guarantee are generally simi - larly treated, with the source of payments for US federal income tax purposes generally deter - mined based on the residence of the borrower. If the lender is receiving security proceeds, the transaction may generally be treated as a pay - ment on the loan. Under certain circumstances, the lender may be treated as the owner of the foreclosed property, resulting in adverse tax con - sequences (especially cases of US real property held by a foreign lender). 4.3 Tax Concerns for Foreign Lenders Continuous and regular lending to US borrow - ers may result in the US government consider - ing the person as engaged in US trade or busi - ness, requiring the lender to file a US tax return and pay income taxes on income attributable to the trade or business. Any activities considered secondary trading are generally exempted from these rules, irrespective of continuity or regular - ity. Foreign lenders should therefore take care to limit the extent and scope of their origination activities. If foreign lenders that are engaged in extensive origination activity are also qualified for the benefits of a double taxation treaty and do not have a permanent establishment in the US, the foreign lenders may be protected under the rules of the treaty. 4.4 Tax Incentives There is no applicable information in this juris - diction. 4.5 Non-Bank Status There is no applicable information in this juris - diction.
As is the case with syndicated loans, private credit lenders typically take a security interest in substantially all of the property and assets of the company group. These assets can be broadly divided into real property interests and personal property interests. Where real property consti - tutes collateral, a lender takes a valid security interest by execution of a mortgage, deed of trust or similar security interest under applicable state law where the real property is located. The creation and enforcement of a security interest in real property is governed by the law of the state where the real property is located, so engage - ment of counsel in this jurisdiction is important to ensure that necessary local law requirements are adhered to. Security interests in personal property are gov - erned by Article 9 (Secured Transactions) of the Uniform Commercial Code (the “UCC”) of the applicable jurisdiction. To create a valid security interest in personal property, including equip - ment, inventory, deposit accounts, investment property, instruments, intangibles, receivables and shares in companies (as well as the other categories of collateral governed by Article 9 of the UCC): • a security provider (the grantor) must execute or authenticate a written or electronic secu - rity agreement that provides an adequate description of the collateral; • the grantor must have rights in the collateral or the power to transfer such rights; and • value must be given. Although the last two requirements are man - datory, an oral security agreement may be suf - ficient if the secured party is in possession or
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