- 14 -
interest received is not effectively connected with the conduct
of a trade or business within the United States.13 Section
1442(a) generally requires the payor of interest subject to the
tax imposed by section 881(a) to deduct and withhold that tax at
the source. If the payor does not do so, then it becomes liable
for such taxes under section 1461.
Under section 894, treaty provisions may modify the Code,
including its withholding tax provisions. However, foreign
corporations are not exempt from U.S. income taxation under a
treaty between the United States and a foreign country unless the
treaty is an income tax treaty and the corporation is a qualified
resident of such foreign country. Sec. 884(e)(1). A qualified
resident means, with respect to any foreign country, any foreign
corporation which is a resident of such foreign country unless
(1) 50 percent or more of the value of the corporation’s stock is
owned by individuals who are not residents of that foreign
12(...continued)
corporation organized under the laws of Hong Kong.
13Sec. 881(c)(1) generally exempts portfolio interest
received by a foreign corporation from sources within the United
States from the sec. 881(a) tax. “Portfolio interest” is defined
as interest paid on certain registered and unregistered
obligations that would otherwise be subject to tax. Sec.
881(c)(2). Portfolio interest, however, does not include such
interest received in certain circumstances by a bank in the
ordinary course of business, by a 10-percent shareholder, or by a
controlled foreign corporation from a related person. Sec.
881(c)(3). Petitioner does not argue that the interest in issue
was portfolio interest.
Page: Previous 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: March 27, 2008