Monday, October 12, 2009

Interest From Loan Origination by Foreign Corporations May Constitute Effectively Connected Income

On September 22, 2009 The Internal Revenue Service (the "IRS") issued an internal memorandum which concludes that interest income earned by a foreign corporation, engaged in loan origination activities through an agent operating in the United States, constitutes income which is effectively connected with a U.S. trade or business. The agent’s activities included solicitation of U.S. borrowers, negotiation of terms, credit analyses, and all other activities relating to loan origination other than final approval and signing of loan documents. The memorandum concludes that the agent’s activities are attributable to the foreign corporation regardless of whether the agent is dependent or independent.

Currently, the IRS memorandum is only accessible through subscription websites, but we will post a link when the IRS makes it publicly available.