I am a South African tax resident. I have set up a Channel islands based trust and company structure in Guernsey to hold a US based loan asset. I will lend funds into the off-shore Trust (this cash has already been externalized out of South Africa to the United States), which will in turn invest these funds into the off-shore company. The off-shore company will then lend this money to a New York based property development business that is building condos in Brooklyn at an interest rate of 7% per annum. I have no relation to the NY company and no ownership in it. The owner of the LLC is a friend of mine and we may look to do future ventures together as well.
The NY company will pay the interest on the loan to the offshore company annually, which in turn will distribute the income as a dividend to the trust. This trust structure will initially only house the loan, but may be used in future for additional global investments as well.
I have a South African tax consultant that has taken care off all the tax issues relating to the structure from the South African and channel islands perspective. From the US perspective, I have also spoken to two large tax consultancies recommended by my Fiduciary who feel that the interest paid by the NY property company will not be subject to withholding tax since it meets the requirements of the Portfolio interest exemption.
One of the tax advisors had a hesitation as to whether the provision of the loan could be viewed as a US trade if it were the only asset/activity within the Guernsey company/trust structure. He later cleared up that this should not be a problem. I would potentially like a sentence/para in the tax memo/e-mail on this point as well.
To summarize the outcomes I am looking for:
1.) A memo to confirm the Portfolio interest applicability for the loan from the Guernsey company to the NYC based LLC.
2.) Adjustments to the loan documentation to bring the note in line with the exemption requirements (latest promissory note and surety document to be provided).
3.) Guidance concerning the effect the loan will have on potential future dealings between the offshore company and the US LLC as follows (with the number 1 priority being to guard against tainting or losing the interest exemption on this initial loan):
a.) If the same offshore company provides further future loans to the LLC, will this affect the exemption on the initial loan and will the new loan still qualify for the exemption?
b.) If the offshore company enters into an equity transaction (for example a 50/50 JV with the LLC to develop or purchase property in the US), will the exemption of the initial loan interest be affected?
c.) Are there any other transactions that the off-shore company should avoid globally or in the US because of the potential affect on the interest exemption of the initial loan?
d.) Could any of the implications of future transactions mentioned in points A/B/C taint the interest exemption on the initial loan if they were to be setup in a different structure from the initial loan (i.e. a new offshore company); or will the new dealings be seen in substance as linked to the initial loan?
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