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are liable for withholding because they have not established any
treaty exemption.
We concluded earlier that the amounts that were paid from
MDT and MSI to MABV and MTBV were not interest because there was
no debt as required under section 163. In reaching our
conclusion, we did not have to make a decision about the
viability of MABV and MTBV as business entities, and we do not
have to do so now. The payments that MDT and MSI made to MABV
and MTBV, respectively, were paid in relation to an equity
contribution from MABV and MTBV to MDT and MSI, respectively.
Accordingly, the payments are subject to the withholding tax, and
respondent's determination is sustained.
B. Franchise Fees That Were Paid by MANV to Manver in
Fiscal Year Ended November 30, 1987
Petitioners argue that Manver was a corporation validly
formed under the laws of The Netherlands and that the payments
were exempt under a treaty with The Netherlands.
Respondent contends that the payments were disguised
dividends that were paid to the Spanish investors, and,
therefore, petitioners are not entitled to a benefit under the
treaty.
We concluded earlier that Manver did not own the
intangibles, and, therefore, there was no "arm's-length" reason
to make franchise payments, and the payments were not "ordinary
and necessary" under section 162(a). Because MANV had no reason
to compensate Manver, the MANV payments were dividends to the
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