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poration from sources within the United States.66 "Portfolio
interest" is defined as any interest (including original issue
discount) that would be subject to tax under section 881(a) but
for section 881(c) and that is paid on certain unregistered or
registered obligations. Sec. 881(c)(2). Portfolio interest does
not, however, include interest received by certain types of
foreign corporations.67 Specifically, portfolio interest does
not include, inter alia, interest received by a 10-percent for-
eign shareholder of the payor corporation.68 Sec. 881(c)(3)(B).
Nor does portfolio interest include interest received by a con-
trolled foreign corporation (CFC), as defined in section 957(a),
66 Sec. 881(c) was added by the Deficit Reduction Act of 1984
(1984 Act), Pub. L. 98-369, sec. 127(b)(1), 98 Stat. 650-651, and
generally applies to portfolio interest received after July 18,
1984, the date of the enactment of the 1984 Act, with respect to
obligations issued after that date in taxable years ending after
that date. Deficit Reduction Act of 1984, Pub. L. 98-369, sec.
127(g)(1), 98 Stat. 652.
67 The General Explanation of the Tax Reform Act of 1984 notes:
Congress did not believe it appropriate to repeal
the 30-percent tax for interest paid to related foreign
* * * [persons], because the combination of [a] U.S.
deduction [for that interest] and non-inclusion [of
that interest in U.S. taxable income] would create an
incentive for interest payments that Congress did not
intend. * * * [Staff of Joint Comm. on Taxation,
General Explanation of the Revenue Provisions of the
Deficit Reduction Act of 1984 at 393-394 (J. Comm.
Print 1984).]
68 The attribution rules of sec. 318(a), with certain modifica-
tions, are used to determine stock ownership for purposes of de-
termining whether a recipient of interest is a 10-percent foreign
shareholder of the payor corporation. Secs. 881(c)(3)(B),
871(h)(3).
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