- 46 -
transfer of revenues from the U.S. Treasury, the
Antilles should have some time to adjust to tax law
changes that affect its economy. [Id. at 392-393.]
See also S. Prt. 98-169 (Vol. 1), supra at 420-421. In the
transition relief provided in DEFRA section 127(g)(3), Congress
thus struck a balance between the generally disfavored use of
conduitlike arrangements to secure treaty benefits and a desired
adjustment period.
We conclude that the circular cash-flow involved in the
capitalization of Finance is not contrary to the principles of
the listed rulings and accordingly that Finance’s debt/equity
ratio did not exceed 5 to 1. We therefore hold that Finance
satisfies requirements based on the principles set forth in the
listed rulings, which qualifies City’s payments of interest
during the years at issue for the relief provided in DEFRA
section 127(g)(3); namely, deemed treatment as made to a resident
of the Netherlands Antilles and therefore exempt from tax under
article VIII(1) of the U.S.-Netherlands income tax treaty.23
Petitioner is therefore not liable for withholding taxes under
section 1461.
23 In light of our holding, we need not address petitioner’s
alternative argument that, absent qualification under DEFRA sec.
127(g)(3), Finance “derived” interest from City within the
meaning of article VIII(1) of the U.S.-Netherlands income tax
treaty.
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