Would relief for interest so paid be restricted by reference to “thin capitalisation” rules?
The United States does not condition its exemption from withholding tax on any minimum level of equity capitalization capitalisation of the borrower. If a borrower is thinly capitalizedcapitalised, however, the Internal Revenue Service (“IRS”) may assert that the debt is equity for tax purposes, in which case the stated interest on the debt may be subject to the withholding tax applicable to dividends. There are, however, two statutory regimes that may potentially limit the deduction of interest by a thinly capitalized capitalised U.S. borrower. Under the “earnings stripping” rules, a borrower will defer, and may lose, its deduction for “excess interest expense” (i.e., interest expense in excess of 50% of cash flows) paid to or guaranteed by certain related parties. In addition, a thinly capitalized capitalised U.S. issuer can deduct only a relatively minimal amount of interest on “corporate acquisition indebtedness” (generally, convertible subordinated debt issued to fund an acquisiti
