Denial of portfolio interest exemption for certain types of contingent interest under Sections 871(h) and 881(c) of the Code: Notice 94-39

DENIAL OF PORTFOLIO INTEREST EXEMPTION FOR CERTAIN TYPES OF CONTINGENT INTEREST UNDER SECS 871(H) AND 881(C) OF THE CODE

NOTICE 94-39

Under Sec 13237 of the Revenue Reconciliation Act of 1993, amending Secs 871(h), 881(c), 1441(c)(9), and 1442 of the Internal Revenue Code, certain types of contingent interest received by a foreign person after December 31, 1993, no longer qualify as portfolio interest. Therefore, withholding agents are now obligated to withhold U.S. tax at the applicable Code or treaty rate on payments of certain types of contingent interest. Withholding agents who fail to withhold and to pay over the tax may be liable for the tax itself, plus penalties and interest.

Generally, a foreign person's U.S. source interest income that is not effectively connected with the conduct of a U.S. trade or business is subject to a 30% withholding tax. There is a significant...