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I have a company in USA, and a company in the BVI is lending…

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I have a company in...
I have a company in USA , and a company in the BVI is lending me money at a 5% interest . i am in the process of returning the interest. Do I need to regester the BVI in USA and pay taxes on the interest received on the BVI.
Submitted: 1 month ago.Category: Tax
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Answered in 19 minutes by:
12/28/2017
Tax Professional: Lev, Tax Advisor replied 1 month ago
Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 31,223
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If that is unsecured loan - registration is not required and interest income woudl generally not be taxable for non US corporation.

However if there is a collateral for that loan which is suited in the US - the interest will be subject to US taxation for a foreign corportaion as sourced within the US.

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Customer reply replied 1 month ago
No this loan was just a private loan with the company in USA there is no calateral involved. Nevertheless , the loan was use by the USA company for the purpose of Real Estate in USA.
Tax Professional: Lev, Tax Advisor replied 1 month ago

see page 10 regarding interest income

https://www.irs.gov/pub/irs-pdf/p519.pdf

Generally, U.S. source interest income includes the following items.
Interest on bonds, notes, or other interest- bearing obligations of U.S. residents or domestic corporations.
Interest paid by a domestic or foreign partnership or foreign corporation engaged in a U.S. trade or business at any time during the tax year.
Original issue discount.
Interest from a state, the District of Columbia, or the U.S. government.

.

and see below

However, the interest will be considered U.S. source interest income if either of the following apply.
a. The recipient of the interest is related to the resident alien or domestic corporation.
See section 954(d)(3) for the definition of related person.

https://www.law.cornell.edu/uscode/text/26/954

(3) Related person defined

For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if—

(A) such person is an individual, corporation, partnership, trust, or estate which controls, or is controlled by, the controlled foreign corporation, or

(B) such person is a corporation, partnership, trust, or estate which is controlled by the same person or persons which control the controlled foreign corporation.

For purposes of the preceding sentence, control means, with respect to a corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power of all classes of stock entitled to vote or of the total value of stock of such corporation. In the case of a partnership, trust, or estate, control means the ownership, directly or indirectly, of more than 50 percent (by value) of the beneficial interests in such partnership, trust, or estate. For purposes of this paragraph, rules similar to the rules of section 958 shall apply.

.

So if BVI corporation is treated as related to the borrower within meaning of section 954(d)(3) - that interest would be taxable and the payer may be classified as withholding agent.

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Customer reply replied 1 month ago
The USA company is own 99% by the same owner of the BVI. the same person owns 99% of USA company and 50% of the BVI.
Tax Professional: Lev, Tax Advisor replied 1 month ago

Section 954(d)(3) determines who is a related person in such situation - and it is referenced above.
That is the person or persons which control the controlled foreign corporation.
"control" means - the ownership, directly or indirectly, of stock possessing more than 50 percent of the total voting power.
We are talking about BVI corporation - if owned 50% - not more - by the same person - that provision would not apply.

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