Portfolio Interest - U.S. Tax Benefits for Foreign Investors

Foreign investors engaging in U.S. investments need to be aware of two key tax concepts:

1. Withholding Tax: All foreign investors are subject to a 30% withholding tax on interest income derived from U.S. sources.

2. Portfolio Interest Exemption: Qualified 'portfolio interest' is exempt from U.S. income tax for foreign investors and deductible for U.S. taxpayers.

Non-U.S. resident foreign individuals and foreign corporations are not subject to any U.S. withholding tax or income tax on portfolio interest, making it an attractive option to promote certain U.S. investments.

The definition of portfolio interest is somewhat complex, but its purpose is to benefit non-U.S. residents and foreign corporations. U.S. residents and citizens are liable for U.S. income tax in all cases.

Specific Provisions

• Portfolio interest does not include any interest payments from the following types of foreign investments:

  • U.S. borrowers do not own 10% or more of the equity;

  • The investment itself is not a debt or loan-related company;

  • Foreign companies controlled by related individuals.

• Additionally, any interest determined in the form of non-cash consideration, such as receipts or sales, does not qualify as portfolio interest.

• Lastly, there are specific 'attribution rules' used to determine the 10% ownership restriction mentioned above.

  
  

For instance, if father F owns 100% of a U.S. company and his two children, C1 and C2, each own 50% of a foreign loan company FC, based on C1 and C2's ownership of the actual foreign company FC, F would be considered the owner of FC.

Similarly, if a subsidiary company FC2 receives interest payments from loans obtained from father's U.S. company, it would not be eligible for this exemption.

For more information or to consult with a tax professional for more specific advice, please feel free to contact us.