As a follow up to a question I was aksed a few weeks ago about Corporation X’s proposed issuance of about $100 million of debt to be packaged and marketed by a foreign institution, I am providing the general withholding tax rules and one of the exceptions that would be applicable to Corporation X’s proposed debt issuance.
Generally, interest paid from US sources to foreign corporations is subject to US withholding at a rate of 30% or the lower rate under an applicable tax treaty.
Interest would be considered US-source if paid by a US citizen or resident or by a domestic corporation. However, no withholding tax is applied to US-source interest payments in the case of
interest on “portfolio debt obligations” of US issuers, defined as corporate and partnership debt issued in registered form and held by persons who own less than 10% of the equity of the issuing corporation (or less than 10% of the capital or profits if the issuing entity is a partnership).
Bearer instruments may also qualify if applicable guidelines are met.
The portfolio exemption does not apply to contingent interest, i.e. interest calculated by reference to the receipts, sales, income, profits, assets, or dividends of the debtor or a related party.