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after 1974, U.S. companies continued to raise capital in the
Eurobond market in the ensuing 10 years, employing finance
subsidiaries incorporated in the Netherlands Antilles for this
purpose and claiming exemption from withholding tax under the
U.S.-Netherlands income tax treaty for interest paid to the
Antilles finance subsidiary by its U.S. parent, on the basis of
opinions of counsel. See S. Prt. 98-169 (Vol. I), at 418-419
(1984).
In 1984 when Congress acted to repeal the withholding tax
for portfolio interest, it was aware that the use of Antilles
finance subsidiaries to avoid the withholding tax during the
prior decade, without favorable letter rulings, was subject to
challenge under then-applicable law. The Senate Finance
Committee, where repeal originated, stated in its report on the
legislation that
Because of a finance subsidiary’s limited
activities, the lack of any significant earning power
other than in connection with the parent guarantee and
the notes of the parent and other affiliates, and the
absence of any substantial business purpose other than
the avoidance of U.S. withholding tax, offerings by
finance subsidiaries involve difficult U.S. tax issues
in the absence of favorable IRS rulings. Since the
marketing of a bond offering is based upon the
reputation and earning power of the parent, and since
the foreign investor is ultimately looking to the U.S.
parent for payment of principal and interest, there is
a risk that the bonds might be treated as, in
substance, debt of the parent, rather than the
subsidiary, and thus withholding could be required.3
* * * Nevertheless, these finance subsidiary
arrangements do in form satisfy the requirements for an
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