A STRATEGY SOME FOREIGN COMPANIES USE TO STRIP EARNINGS FROM THEIR US SUBSIDIARIES is expected to be shut down

A STRATEGY SOME FOREIGN COMPANIES USE TO STRIP EARNINGS FROM THEIR US SUBSIDIARIES is expected to be shut down

September 01, 2000
A STRATEGY SOME FOREIGN COMPANIES USE TO STRIP EARNINGS FROM THEIR US SUBSIDIARIES is expected to be shut down.

A Treasury lawyer said in August regulations will be issued “soon.” In one version of the strategy, a foreign parent owns a US holding company that, in turn, owns US operating subsidiaries. The US holding company is a “reverse hybrid.” It is treated as a corporation for US tax purposes but as transparent for tax purposes in the parent’s home country. The US holding company receives dividends from its operating subsidiaries. It pays the money up to the parent in the form of interest. However, the parent company is viewed at home as receiving the dividends directly because of the transparency of its US holding company. The dividend either escapes tax in the parent’s home country or brings with it foreign tax credits.

Meanwhile, the US views the US holding company as having made a deductible interest payment. The interest qualifies for a reduced withholding rate under a US tax treaty.

The US government is also concerned about variations on this base case.

Keith Martin