This rule also permits a group to centralize its foreign finance function in a foreign subsidiary, which can receive interest on loans made to related foreign affiliates without U.S. taxation.
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Iceland's banks collapsed in 2008 after years of growth that depended on foreign loans.
The result is that in Latin America's seven largest economies, foreign banks now control around 15% of total loans and 16% of total deposits.
The IRS says that foreign investors who directly purchase passive interests in U.S. business loans, at the time the loan is made, are doing business in the U.S. and should be taxed on their earnings and profits as if they are a U.S. resident.
FORBES: How Washington Starves Small Business Of Foreign Capital
Nyenrode (see profile), a Dutch school, has announced that it is postponing the start of this year's full-time MBA because it can no longer secure bank loans for its foreign students, blaming the recession.
Until a few months ago, Japan's investment banks were trawling foreign banks in Hong Kong and Singapore, hawking whole portfolios of loans, priced to go.
While CDB's primary mandate is to support China's domestic development, with foreign currency-denominated lending accounting for only 21% of outstanding loans at the end of 2011, it is also tasked with supporting the development of China's interests overseas.
The apocalyptic tax consequence of being a passive investor in small business loans stops virtually all foreign investors from participating directly in the U.S. small business loan market while driving their investment dollars into the corporate bond market.
FORBES: How Washington Starves Small Business Of Foreign Capital
Some argue that the true cost of that costless Mexican bail-out is today's crisis in Asia because foreign lenders learned in 1995 that they would be rescued if their loans turned bad, and therefore lent more than they should to Asia.
After Mr Nyerere's resignation in 1985, his successor, Ali Hassan Mwinyi, attempted to raise productivity and attract foreign investment and loans by dismantling government control of the economy.
Fortunately, exceptions are provided for loans to and stock held in unrelated U.S. corporations, as these investments do not make foreign subsidiary funds available to the U.S. parent company.
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