US vs Container Corp., May 2011, US COURT OF APPEALS, No. 10-60515

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In this case a US subsidiary, Container Corp, had paid guaranty fees to its foreign parent company Vitro in Mexico. In the US tax return, the fee had been considered analogous to payments for services, and the income was sourced outside the United States and not subject to withholding tax.

The IRS held that the guaranty fees were more closely analogized to interest and thus subject to withholding taxes of 30 %.

The Tax Court issued an opinion siding with Container Corp. The Commissioner brought the opinion before the US Court of Appeals.

The Court of Appeals also found in favor of Container Corp.

To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the “substance of the transaction”. The Commissioner contends the guaranty fees are more closely analogized to interest, while Container Corporation argues that the fees are more closely analogous to payment for services.

The source of payments for services is where the services are performed, not where the benefit is inured. The Tax Court held that the parent company’s promise to pay in the event of default produced the guaranty fees. The parent company guaranty was the service. Thus, the services were performed in Mexico, and International did not have to withhold thirty percent of the guaranty fees paid.

Under these factual circumstances, the guaranty fees are more analogous to payments for services, and the income was properly sourced outside the United States. As we find no reversible error of fact or law, the judgment of the Tax Court is AFFIRMED.

The decision from the Court of Appeal

US vs Container Corp10-60515.0.wpd

The opinion from the Tax Court

US vs Container Corp Opinion

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