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income tax treaty between the United States and the Netherlands,
as extended to the Netherlands Antilles (Treaty), provided the
following:
(1) Interest on bonds, notes, debentures,
securities, deposits or any other form of indebtedness
* * * paid to a resident or corporation of one of the
Contracting States shall be exempt from tax by the
other Contracting State. [Convention with Respect to
Taxes, Apr. 29, 1948, U.S.--The Neth., art. VIII, 62
Stat. 1757, 1761, supplemented by Protocol, Oct. 23,
1963, 15 U.S.T. 1900, modified by Supplementary
Convention, Dec. 30, 1965, 17 U.S.T. 896, 901.]
In light of this Treaty provision, if petitioner's interest
payments are recognized as having been paid to Finance, Finance
would not be liable for the tax imposed by section 871(a)(1), and
petitioner would be under no obligation to withhold tax pursuant
to section 1441.
Respondent determined that petitioner was required to
withhold taxes pursuant to section 1441 on the interest payments
to the Euronote holders. Respondent's position is based on the
proposition that Finance should be ignored and that petitioner
should be viewed as having paid interest directly to the Euronote
holders. Respondent argues that Finance was a mere conduit or
agent in the borrowing and interest-paying process.
Petitioner formed Finance for the purpose of borrowing money
in Europe and lending money to petitioner. Normally, a choice to
transact business in corporate form will be recognized for tax
purposes so long as there is a business purpose or the
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