P, a DOMESTIC UTILITY COMPANY, formed F as a Subsidiary CORPORATION in the NETHERLANDS ANTILLES. F's only activity was to borrow money by issuing EURONOTES and then LEND the proceeds to Pat an interest rate that was 1 percent greater than the rate on the EURONOTES.

 

P, a DOMESTIC UTILITY COMPANY, formed F as a Subsidiary CORPORATION in the NETHERLANDS ANTILLES. F's only activity was to borrow money by issuing EURONOTES and then LEND the proceeds to Pat an interest rate that was 1 percent greater than the rate on the EUEONOTES. Sec. 1441, I.R.C., generally requires a domestic taxpayer to withhold a 30-percent tax on interest paid to nonresident aliens. However, payments to NETHERLANDS ANTILLES CORPORATIONS were exempted from this TAX pursuant to treaty. R determined that F was a mere conduit or agent of P, that P should be treated as having paid interest directly to the Euronote holders, and that P is therefore liable for the withholding tax.

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