US Inbound: IRS issues portfolio interest payment clarification

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Inbound: IRS issues portfolio interest payment clarification

fuller.jpg

forst.jpg

Jim Fuller


David Forst

A recent IRS Chief Counsel Advice Memorandum (CCA 201434021) addressed a situation where a US payor of interest to non-US, non-resident alien individuals sought, after the payments, to obtain the required documentation to qualify the payments as portfolio interest, and thus as exempt from US withholding tax. The US payor had not withheld any amounts on the original interest payments. Treasury Regulation § 1.1441-1(b)(7)(ii) provides that proof of a reduced rate of withholding may be established after the date of payment on the basis of a valid withholding certificate or documentary evidence furnished after that date, but states that additional proof may be required "if it is determined that the delays in obtaining the withholding certificate affect its reliability".

Treas. Reg. § 1.1441-1(b)(4)(i) states that portfolio interest is exempt from US withholding provided that documentation establishing foreign status is furnished for interest on an obligation in registered form. Treas. Reg. § 1.871-14(c)(3)(i) states that interest on a registered obligation qualifies as portfolio interest if the withholding certificate or documentary evidence that must be provided is furnished before expiration of the beneficial owner's period of limitation for claiming a refund of tax with respect to the interest.

Two fact patterns were considered in the CCA: (1) the non-resident alien individual did not file a US tax return or pay any US tax for the year in which the payments were made; and (2) the non-resident alien individual filed a US tax return and paid tax unrelated to the interest payments for the year in which the payments were made.

The Chief Counsel Advice held that the withholding agent was not barred from obtaining the documentation in situations in which the non-resident alien individual had not filed a US tax return and had not paid any tax for the year in which the interest payments were made. The non-resident alien's statute of limitations for seeking a refund was still open. However, the withholding agent may be required to provide additional proof of entitlement to a reduced rate of withholding under Treas. Reg. § 1.441-1(b)(7)(ii) to the extent that the reliability of the documentation is affected by the delay in obtaining it.

In situations where the non-resident alien filed a US tax return and paid tax for the year in which the interest payments were made, the Chief Counsel Advice stated that the withholding agent may be barred under Treas. Reg. § 1.871-14(c)(3)(i) from obtaining the documentation. The filing of a return and the payment of tax both cause a non-resident individual's period of limitations under § 6511(a) to begin. The withholding agent, according to the CCA, has until the expiration of that period to obtain the required documentation.

The solution presented in the Chief Counsel Advice was messy at best, requiring the US payor of interest to ascertain tax return information of the payee(s). Any US person who does not make necessary withholdings of interest is liable under § 1461 for the tax owing. Thus, the payor of the interest will have to pursue the required documentation.

Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)

Fenwick & West

Tel: +1 650 335 7205; +1 650 335 7274

Website: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

The controversial deal will allow US-parented groups to be carved out from key aspects of pillar two
Awards
ITR invites tax firms, in-house teams, and tax professionals to make submissions for the 2027 World Tax rankings and the 2026 ITR Tax Awards globally
Pillar two was ‘weakened’ when it altered from a multinational convention agreement to simply national domestic law, Federico Bertocchi also argued
Imposing the tax on virtual assets is a measure that appears to have no legal, economic or statistical basis, one expert told ITR
The EU has seemingly capitulated to the US’s ‘side-by-side’ demands. This may be a win for the US, but the uncertainty has only just begun for pillar two
The £7.4m buyout marks MHA’s latest acquisition since listing on the London Stock Exchange earlier this year
ITR’s most prolific stories of the year charted public pillar two spats, the continued fallout from the PwC Australia tax leaks scandal, and a headline tax fraud trial
The climbdowns pave the way for a side-by-side deal to be concluded this week, as per the US Treasury secretary’s expectation; in other news, Taft added a 10-partner tax team
A vote to be held in 2026 could create Hogan Lovells Cadwalader, a $3.6bn giant with 3,100 lawyers across the Americas, EMEA and Asia Pacific
Foreign companies operating in Libya face source-based taxation even without a local presence. Multinationals must understand compliance obligations, withholding risks, and treaty relief to avoid costly surprises
Gift this article