Rev. Rul. 81-30

1981-1 C.B. 388, 1981-4 I.R.B. 14.

                       Internal Revenue Service
                                 Revenue Ruling

                 INTEREST ON EURODOLLAR CERTIFICATES OF DEPOSIT

                          Published: January 26, 1981

SECTION 861.--INCOME FROM SOURCES WITHIN THE UNITED STATES, 26 CFR 1.861-2: Interest

  Interest on Eurodollar certificates of deposit. Eurodollar certificates of deposit represent deposits within the meaning of section 861(c) of the Code for purposes of the application of section 861(a)(1)(A) to the interest earned thereon.

ISSUE

  Do Eurodollar certificates of deposit ('ECDs') represent 'deposits' within the meaning of section 861(c) of the Internal Revenue Code for purposes of the application of section 861(a)(1)(A) of the Code to interest earned on such certificates?

FACTS

  The Federal Home Loan Bank Board (the 'Board') has amended the Rules and Regulations for the Federal Savings and Loan System, 12 CFR Parts 545 and 563 (1979), to authorize federal savings and loan associations and state chartered insured savings and loan associations and mutual savings banks to issue ECDs. These regulations define an ECD as a certificate of deposit denominated in United States dollars that represents deposits by individuals or entities that are not United States persons within the meaning of section 7701(a)(30) of the Code.  The Board's regulations impose certain penalties when beneficial ownership of ECDs is acquired by a United States person. ECDs may be issued in denominations of at least $100,000 with a minimum participation interest level of at least $10,000.  ECDs may be, but need not be, secured under certain conditions by the issuing institution.  ECDs may or may not be issued in negotiable form.  The ECDs, as savings accounts, are federally insured to the extent of $100,000, with participations therein not separately insured.  ECDs must have an original maturity of 5 years or more and must provide a fixed rate of return when issued limited gross-up (guarantee of interest net of withholding taxes) and redemption provisions in order to ensure their investment viability in the Eurodollar market.

  The underlying purpose of the Board's authorizing the issuance of ECDs by federal savings and loan associations and other state chartered institutions is to enable such institutions that ordinarily do not deal in international money markets to reach capital sources.

LAW AND ANALYSIS

  Section 861(a)(1)(A) of the Code provides that interest on amounts described in section 861(c) received by a nonresident alien individual or foreign corporation shall not be treated as income from sources within the United States if such interest is not effectively connected with the conduct of a trade or business within the United States.

  Section 861(c) of the Code provides that for purposes of section 861(a)(1)(A), the amounts described include deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under federal or state law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under section 591 (determined without regard to section 265) in computing the taxable income of such institutions, as well as amounts deposited with persons carrying on the banking business, and insurance companies.

  Rev. Rul. 72-104, 1972-1 C.B. 209, holds that deposits made by a nonresident alien individual not engaged in the conduct of a trade or business in the United States with several United States banking institutions in the form of time certificates of deposits, open account time deposits, and multiple maturity deposits, all bearing interest, are deposits within the meaning of section 861(c) of the Code for purposes of the application of section 861(a)(1)(A).

  ECDs are certificates of deposit. Any differences from conventional certificates of deposit, such as provisions for security, gross-up, and redemption, are intended solely to enhance their marketability.

HOLDING

  Eurodollar certificates of deposit represent deposits within the meaning of section 861(c) of the Code for purposes of the application of section 861(a)(1)(A) to the interest earned thereon, subject only to the limitations provided in this section.

Rev. Rul. 81-30, 1981-1 C.B. 388, 1981-4 I.R.B. 14.