• IRS Issues Guidance on U.S. Lending Activities by Non-U.S. Investor
  • October 16, 2009
  • Law Firm: Kaye Scholer LLP - New York Office
  • A major U.S. tax issue for off-shore funds and other non-U.S. holders of U.S.-source debt is whether the income (interest and any gains on sale) from such debt will be treated as "effectively connected income" ("ECI") subject to U.S. income tax, as opposed to non-ECI, i.e., investment income exempt from U.S. tax. The answer depends on whether the fund or other holder is deemed to be engaged in a banking, finance or similar business (in such case subject to full U.S. tax) or viewed as simply an investor in debt securities (no U.S. tax). Unfortunately, there is limited case law or other authority as to when the line is crossed from mere investment to the active conduct of a finance business.