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as income from sources without the United States. Sec.
862(a)(1). Generally, interest from a foreign corporation is not
treated as income from sources within the United States pursuant
to section 861(a)(1)25 and is therefore treated as income from
sources without the United States. Sec. 862(a)(1). Section
884(f)(1)(A) provides special source rules for certain interest
paid by a foreign corporation engaged in trade or business in the
United States.
(2) Taxation of Interest
Section 871(a)(1)(A) imposes on a nonresident alien
individual and section 881(a)(1) imposes on a foreign corporation
a tax of 30 percent of the amount of interest that is treated as
income from sources within the United States, if the interest is
not effectively connected income to the recipient. Interest that
is treated as income from sources without the United States is
25
The Tax Reform Act of 1986, sec. 1241(b)(1)(A), 100 Stat.
2579, replaced the words "residents, corporate or otherwise" in
sec. 861(a)(1) with the words "noncorporate residents or domestic
corporations." The current sec. 861(a)(1), therefore, does not
refer to foreign corporations, which are instead covered pursuant
to sec. 884(f). Consequently, sec. 1.861-2(a)(2), Income Tax
Regs., issued pursuant to former sec. 861(a)(1), which treats
foreign corporations engaged in a U.S. trade or business at any
time during the taxable year as a U.S. resident for purposes of
the source rule, is irrelevant to years after sec. 861(a)(1) was
amended. The general rule, however, that the source of interest
depends on the residence of the obligor retains its validity.
The regulations do not explicitly state that a corporation’s
"residence" is its place of incorporation, but sec. 861(a)(1)
does distinguish between "domestic" and "foreign" corporations
without reference, for example, to a "principal place of
business". Consequently, we conclude that the source of interest
depends on a corporation’s place of incorporation.
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