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Eurobond obligations of the finance subsidiary, and it was the
strength of this guaranty on which the holders of the
subsidiary’s Eurobond obligations relied. Moreover, the U.S.
parent (or affiliate) would make interest and principal payments
on its promissory note to the finance subsidiary that generally
mirrored the subsidiary’s obligations to the Eurobond holders,
and the subsidiary would use those payments to fund its payments
to the bondholders. If the finance subsidiary was incorporated
in a foreign jurisdiction, such as the Netherlands Antilles,
having a tax treaty with the United States providing for an
exemption from withholding tax on U.S.-source interest paid to a
resident of the foreign jurisdiction, eligibility for such an
exemption would typically be claimed with respect to the U.S.
parent’s payment of interest to the foreign finance subsidiary.
See Joint Comm. on Taxation, Tax Treatment of Interest Paid to
Foreign Investors, at 8-9 (J. Comm. Print 1984).
As recounted in the legislative history of the repeal of the
withholding tax on portfolio interest, the use of such finance
subsidiaries originally arose as a result of
a change in the ruling policy of the IRS which
encouraged foreign borrowings through finance
subsidiaries. In the case of finance subsidiaries,
domestic or foreign, the IRS was prepared to issue
private rulings that no U.S. withholding tax applied if
the ratio of the subsidiary’s debt to its equity did
not exceed 5 to 1 and certain other conditions were
met. Numerous private rulings were issued on this
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