Rev. Rul. 72-299

Advice has been requested whether, under the circumstances described below, an acquisition of time deposits by a domestic corporation from a foreign financial institution is excluded from interest equalization tax under section 4915(a) of the Internal Revenue Code of 1954.

X, a domestic corporation, wholly owns Y, a foreign corporation. Y is engaged in trade or business in foreign country S. In 1968, Y was in need of additional funds but because of local restrictions found it difficult to borrow sufficient funds locally to meet its requirements. Also because of administrative practice of country S, Y was prevented from obtaining a direct investment from X. X, therefore, entered into an arrangement with T, an unrelated financial institution incorporated in country S, whereby X made a three-year time deposit of 100x dollars bearing interest at an annual rate of five percent. Simultaneously, under the arrangement, Y borrowed for a three-year term an equivalent amount in the currency of country S at an annual interest rate of six percent issuing its promissory note to T therefor. Such financial arrangement is sanctioned by country S. When the loan was repaid by Y to T in 1971, T returned the 100x dollar deposit to X.

Section 4911(a) of the Code, to the extent here pertinent, imposes the interest equalization tax on each acquisition by a United States person of a debt obligation of a foreign obligor if such obligation has a period remaining to maturity of one year or more.

Section 4915(a) of the Code provides, in part, that, except as provided in sections 4915(c) and 4915(d) of the Code, the tax imposed by section 4911 of the Code shall not apply to the acquisition by a United States person of a debt obligation of a foreign corporation if immediately after such acquisition such person (or one or more includible corporations in an affiliated group, as defined in section 1504 of the Code, of which such person is a member) owns directly or indirectly 10 percent or more of the total combined voting power of all classes of stock of such foreign corporation.

Section 4915(c)(1) of the Code provides that section 4915(a) of the Code shall be inapplicable in any case where the foreign corporation is formed or availed of by the United States person for the principal purpose of acquiring through such foreign corporation, an interest in stock or debt obligations of one or more other foreign issuers or obligors, the direct acquisition of which by the United States person would be subject to the interest equalization tax imposed by section 4911 of the Code.

Section 4915(d) of the Code provides that section 4915(a) of the Code shall be inapplicable in any case where the acquisition of stock or debt obligations of the foreign corporation is made with intent to sell, or offer to sell, any part of the stock or debt obligations acquired to United States persons.

The financial arrangement in the instant case required by local administrative action is analogous to the requirement of certain foreign countries for the acquisition of stock or debt obligations of certain foreign issuers or obligors by a United States person doing business in such foreign countries. In the latter situation the Congress provided relief under section 4914(b)(3) of the Code. Under that section, the tax imposed by section 4911 of the Code does not apply to the acquisition of foreign stock or debt obligations by a United States person doing business in a foreign country to the extent that such acquisition is reasonably necessary to satisfy the minimum requirements relating to such acquisition imposed by the laws of such foreign country. In addition, the Congress indicated its approval for extending the exclusion to acquisitions required under foreign administrative action. House Report No. 1046, Eighty-eighth Congress, C.B. 1964-2, 708, at 732 states "* * * The exclusion applies to acquisitions in amounts reasonably required to comply with legal requirements, whether such requirements are expressly set forth by statute or are imposed by administrative action under applicable law.* * *" Therefore, although section 4914(b)(3) of the Code is not directly applicable to the instant case, it is consistent with the expression of Congressional purpose of relief from imposition of the interest equalization tax where foreign laws or administrative practices have resulted in otherwise taxable acquisitions of foreign securities by United States persons.

Accordingly, the acquisition in 1968 by X of the three-year time deposit of 100x dollars from T is treated as acquisitions of debt obligations of Y, X's foreign subsidiary, and is excluded from the imposition of the interest equalization tax under section 4915(a) of the Code unless sections 4915(c) or 4915(d) of the Code apply.