In Chief Counsel Advice 201501013, the IRS determined that a foreign fund was engaged in a U.S. trade or business (“ETBUS”) based on lending and underwriting activities conducted on the fund’s behalf by a U.S. resident fund manager under a management agreement. The IRS attributed the manager’s activities to the fund, for purposes of the ETBUS analysis, finding the activities to be “considerable, continuous, and regular.” The CCA further concluded that the foreign fund’s activities did not qualify for the “trading safe harbors” under Section 864, exploring the fine distinction between “traders” and “dealers.” Because the fund was organized in a non-treaty jurisdiction, the IRS’ determination that the fund was ETBUS meant that the fund was subject to U.S. income tax on income effectively connected with its U.S. lending and underwriting business.
Whether a foreign person is ETBUS (especially those in jurisdictions with which the United States does not have an income tax treaty) is the linchpin for subjecting foreign persons to regular U.S. income taxation at graduated rates. Unfortunately, there is relatively little guidance on when a foreign person’s U.S. activities rise to the level of ETBUS, despite the significant tax consequences that can result. Foreign taxpayers engaged lending or stock or securities transactions, and whose status as ETBUS is unclear, should consult with professional advisers to ascertain their U.S. tax exposure.
See our January 2015 International Tax Advisory for more in-depth discussion of CCA 201501013.
