Tuesday, October 23, 2007

Financing U.S. Subsidiaries of European Multinationals

European multinationals often attempt to minimize the U.S. corporate income tax burden on profitable U.S. subsidiaries by introducing related-party debt into their capital structure. While the tax planning objective is clear, the optimal financing structure often is not because of a labyrinth of complex U.S. tax issues. For example, a related party loan made by a group finance subsidiary located in a low-tax jurisdiction raises complicated factual and legal issues under the U.S. “anti-conduit” provisions. In very broad terms, these provisions empower the Internal Revenue Service (IRS) to disregard an intermediate entity in a back-to-back financing arrangement that is part of a plan to reduce U.S. withholding taxes.


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