Press Room: Tax Release

May 09, 2011

Opportunity for Refund of U.S. Withholding Tax on Guarantee Fees

An opportunity may exist for taxpayers to claim refund of US withholding tax on guarantee fees paid to foreign persons by a U.S. taxpayer under guarantees issued on or before September 27, 2010.

In Container Corp v. Commissioner, the Fifth Circuit Court held that guarantee fees paid by a U.S. corporation to its Mexican parent were amounts paid for a service performed in Mexico, not interest. Accordingly, the fees were not subject to the U.S. gross basis withholding tax. The fees were paid to guarantee the subsidiary's debt to its U.S. lenders. The guarantee agreement set the fee at 1.5% of the outstanding principal balance of the notes per year. The Mexican parent charged all of its subsidiaries the same fee regardless of the subsidiary's capital structure or financial condition. The fees were not tied to the amount of work the Mexican parent did to negotiate or monitor the guarantee.

The Fifth Circuit reasoned that the guarantee was not a loan transaction since no money was exchanged. The facts indicated that the parent was being compensated for its promise to standby in the event a future obligation materialized and not for putting its money at risk at the time of signing the guarantee. The Court concluded that the parent’s guarantee was therefore a service and the services were performed in Mexico. Therefore, no withholding tax was due.

For guarantees issued after September 27, 2010, the Small Business Jobs Act of 2010 legislatively overruled the Tax Court's decision in Container Corp. v Commissioner. Thus, the Fifth Circuit’s decision applies to all guarantees issued before September 27, 2010, and to the extent non-U.S. taxpayers have paid withholding tax prior to that date, an opportunity exists to claim refunds for any such taxes paid. While the Fifth Circuit opinion was not officially published and cannot be cited as authority, companies should consider determining if refund claims should be filed because there is a strong possibility that other courts will adopt the reasoning that prevailed in the Fifth Circuit.