Riggs National Corporation & Subsidiaries, f.k.a. Riggs National Bank and Subsidiaries - Page 36

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               agrees to pay B a certain amount of interest net of any                
               tax that country X may impose on B with respect to its                 
               interest income.  Country X imposes a 10 percent tax on                
               the gross amount of interest income received by                        
               nonresidents of country X from sources in country X,                   
               and it is established that this tax is a tax in lieu of                
               an income tax within the meaning of � 1.903-1(a).                      
               Under the law of country X this tax is imposed on the                  
               nonresident recipient, and any resident of country X                   
               that pays such interest to a nonresident is required to                
               withhold and pay over to country X 10 percent of the                   
               amount of such interest, which is applied to offset the                
               recipient’s liability for the tax.  Because legal                      
               liability for the tax is imposed on the recipient of                   
               such interest income, B is the taxpayer with respect to                
               the country X tax imposed on B’s interest income from                  
               B’s loan to A.  Accordingly, B’s interest income for                   
               federal income tax purposes includes the amount of                     
               country X tax that is imposed on B with respect to such                
               interest income and that is paid on B’s behalf by A                    
               pursuant to the loan agreement, and, under paragraph                   
               (f)(2)(i) of this section, such tax is considered for                  
               purposes of section 903 to be paid by B.                               
                    Example (2).  The facts are the same as in example                
               (1), except that in collecting and receiving the                       
               interest B is acting as a nominee for, or agent of, C,                 
               who is a United States person.  Because C (not B) is                   
               the beneficial owner of the interest, legal liability                  
               for the tax is imposed on C, not B (C’s nominee or                     
               agent).  Thus, C is the taxpayer with respect to the                   
               country X tax imposed on C’s interest income from C’s                  
               loan to A.  Accordingly, C’s interest income for                       
               federal income tax purposes includes the amount of                     
               country X tax that is imposed on C with respect to such                
               interest income and that is paid on C’s behalf by A                    
               pursuant to the loan agreement.  Under paragraph                       
               (f)(2)(i) of this section, such tax is considered for                  
               purposes of section 903 to be paid by C.  No such tax                  
               is considered paid by B.                                               
                    Example (3).  Country X imposes a tax called the                  
               “country X income tax.”  A, a United States person                     
               engaged in construction activities in country X, is                    
               subject to that tax.  Country X has contracted with A                  
               for A to construct a naval base.  A is a dual capacity                 
               taxpayer (as defined in paragraph (a)(2)(ii)(A) of this                
               section) and, in accordance with paragraphs (a)(1) and                 





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Last modified: May 25, 2011