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event that a withholding tax is imposed as a result of
a change in law or interpretation occurring after the
obligations are issued). Because the Eurobond market
is generally comprised of bonds not subject to
withholding tax by the country of source, an issuer may
not be able to compete easily for funds in the Eurobond
market solely on the basis of price if its interest
payments are subject to a substantial tax. U.S.
corporations currently issue bonds in the Eurobond
market free of U.S. withholding tax through the use of
international finance subsidiaries, almost all of which
are incorporated in the Netherlands Antilles.
Finance subsidiaries of U.S. corporations are usually
paper corporations, often without employees or fixed assets,
which are organized to make one or more offerings in the
Eurobond market, with the proceeds to be relent to the U.S.
parent or to domestic or foreign affiliates. The finance
subsidiary's indebtedness to the foreign bondholders is
guaranteed by the U.S. parent (or other affiliates).
Alternatively, the subsidiary's indebtedness is secured by
notes of the U.S. parent (or other affiliates) issued to the
Antilles subsidiary in exchange for the loan proceeds of the
bond issue. Under this arrangement, the U.S. parent (or
other U.S. affiliate) receives the cash proceeds of the bond
issue but pays the interest to the Antilles finance
subsidiary rather than directly to the foreign bondholders.
[S. Prt. 98-169 (Vol. I), at 418 (1984).]
The above description closely corresponds to the manner in which
petitioner sought access to the Eurobond market.
Petitioner wanted to take advantage of favorable Eurobond
interest rates. However, prospective lenders did not want to be
liable for the 30-percent tax imposed by section 871(a)(1).
Prospective lenders were willing to lend money to Finance because
it was a Netherlands Antilles corporation whose notes would not
be subject to tax under section 871(a)(1). The business purpose
of Finance was to borrow money in Europe at a favorable rate and
lend money to petitioner. For its involvement, Finance would
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