Proposed changes to 10% shareholder definition
The U.S. portfolio interest exception is a tax incentive to make investments in the United States more attractive to non-U.S. investors. The portfolio interest exemption provides relief from the default withholding tax rate of 30% on U.S.-sourced interest income in certain circumstances.
One of the requirements for a valid portfolio interest exception is that the beneficial owner of the interest income is not a 10% shareholder of the borrower. Under current law, a 10% shareholder includes any person who owns 10% or more of the total combined voting power of all classes of stock of a corporate borrower.
In connection with Build Back Better Act tax proposals, there is a proposed change to the 10% shareholder definition. According to the proposal, a 10% shareholder includes any person who owns 10% or more of the total combined voting power of all classes of stock or 10% or more of the total value of the stock of a corporate borrower. The proposal would be effective after the date of enactment of the law.
The proposal may have a significant impact on investment funds with U.S. assets. In particular, the proposal is most likely to impact investors who do not qualify for U.S. income tax treaty benefits.
Do you have questions regarding applying the portfolio interest exception to a payment of interest to a non-U.S. person, U.S. withholding tax reporting, or U.S. withholding tax documenation? Contact International Capital Associates, LLC to discuss.
