LOAN GUARANTEE FEES from a US subsidiary to its foreign parent are subject to US withholding taxes

LOAN GUARANTEE FEES from a US subsidiary to its foreign parent are subject to US withholding taxes

December 01, 2001
LOAN GUARANTEE FEES from a US subsidiary to its foreign parent are subject to US withholding taxes.

A US company borrowed money. Its foreign parent guaranteed repayment of the loan. The subsidiary paid the parent ongoing guarantee fees.

The United States normally collects a 30% withholding tax on payments by US companies to persons who are offshore. The rate is sometimes reduced by treaty. Withholding taxes ordinarily apply only to payments that are considered to have a “US source.”

The subsidiary argued in this case that the payments are foreign source because they are for services by the parent, and the services are performed abroad. The IRS said that the payments are more in the nature of interest, which is sourced to where the payor resides — in this case, in the United States.

The taxpayer then argued that the withholding tax should be at less than a 30% rate because a tax treaty between the US and the country that is home to the parent company provides for a lower withholding rate on “interest.”  The IRS said the provision does not apply because guarantee fees are not literally “interest.”

The IRS released a “field service advice” in November on the case. The number is FSA 200147033.

Keith Martin