The U.S. Tax Court issued an opinion on February 17, 2010
clarifying the source of guaranty fees for U.S. tax purposes, which
has previously been subject to confusion. This issue has arisen
when a U.S. resident pays a guaranty fee to a non-U.S.
affiliate.1 The Container Corp. v.
Commissioner case confirmed that fees paid to a non-U.S.
resident who does not have a U.S. trade or business for guarantying
a debt of a U.S. resident will not be subject to U.S. withholding
tax under U.S. law, without the need to rely on a treaty for
Container Corp. concerned International, a U.S.
subsidiary, which, from 1991 through 1993, paid more than $6.7
million in guaranty fees to Vitro, its Mexican parent, in
connection with debt International incurred to assist Vitro and
another U.S. subsidiary. The fee was 1.5% of the principal amount
of the outstanding debt.
International did not withhold on the payment of fees to Vitro so
the Internal Revenue Service issued a notice of deficiency arguing
that the guaranty fees were interest and, because they were paid by
a U.S. corporation, were U.S. source income subject to withholding
tax under the Internal Revenue Code. International countered that
the guaranty fees were fees for services.
The Tax Court rejected International's argument that the
guaranties were services but considered whether the fees should be
sourced by analogy to interest or services. The Tax Court noted
that a fee is analogous to interest when the payee substitutes its
own credit for that of the payor, such as in acceptances and
confirmations of letters of credit. Guaranties, the Tax Court held,
however, were not the same because, in a guaranty, the guarantor
augments the credit of the borrower as opposed to substituting its
own credit therefor.
The Tax Court determined that this distinction was meaningful
because on an event of default, the guarantor would be at risk only
if the borrower defaulted on the loan, the guarantor paid the
obligation, and then the borrower defaulted on the new obligation
it would have to the guarantor.
The Tax Court then held that guaranty fees are analogous to a
payment for services because they are a payment for possible future
services. The Tax Court stated that it is the promise of the
guarantor and the assets of the guarantor that make the fee
possible, so the income should be sourced to the location of the
1. Container Corp. v. Commissioner,
T.C., No. 3607-05, 134 T.C. No. 5, 2/17/10.
2. The Fifth Protocol to the U.S.-Canada Treaty recently provided a
clear answer that guaranty fees are subject to tax only in the
country of residence of the guarantor.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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