Amcar, a U.S. corporation, had negotiated to borrow $20 million from a bank in N

Question

Amcar, a U.S. corporation, had negotiated to borrow $20 million from a bank in Norway. The interest rate demanded by the bank is “eight percent, net of U.S. taxes.” Assume there is no tax treaty between the United States and Norway, Amcar owns a subsidiary, Partsub, established and operated in Sweden that manufactures several small parts imported into the United States for use in Amcar’s manufacturing operation. The Norwegian bank agrees to loan the $20 million to Partsub at a net interest of 8%. Partsub in turn loans $20 million to Amcar at 9% per annum. Assume that the U.S. Model Treaty applies between Sweden and the United States. Do U.S. withholding taxes apply to any interest payments?

Explanation / Answer

Amcar owns a subsidiary, Partsub, established and operated in Sweden that manufactures several small parts imported into the United States for use in Amcar’s manufacturing operation. The Norwegian bank agrees to loan the $20 million to Partsub at a net interest of 8%. Partsub in turn loans $20 million to Amcar at 9% per annum.

Since it is assumed in question that the U.S. Model Treaty applies between Sweden and the United States, US withholding taxes will apply to interest payments (9% per annum interest) when payments are made by Amcar (Holding) to Partsub (Subsidiary) at 30% Withholding tax rate.

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