Structuring Foreign Investments in U.S. Corporations Using Portfolio Debt Guaranteed by the Issuer's Foreign Affiliate

Abstract

Under sections 871(h) and 881(c) of the Internal Revenue Code [hereinafter I.R.C. or Code], a nonresident alien individual or foreign entity [hereinafter Foreign Person] can qualify for a complete exemption from U.S. federal income taxation on "portfolio interest" income from a U.S. debtor, provided such income is not effectively connected with the conduct by such Foreign Person of a trade or business in the United States.' Two types of instruments may qualify for the portfolio interest exemption nonregistered instruments (such as bearer instruments) and registered instruments. Without the exemption, portfolio interest is subject to a U.S. federal withholding tax equal to thirty percent of the gross amount paid (except as reduced under a bilateral income tax treaty between the United States and the creditor's country of residence). 2