Rev. Rul. 83-10
Rev. Rul. 83-10 [FN1]
Internal Revenue Service
Revenue Ruling
INCOME SOURCE; VIRGIN ISLANDS
Published: January 10, 1983
26 CFR 4a.861-1: Special rules for determining source of interest and dividends
Income source; Virgin Islands. Interest received by a Virgin Islands corporation from a U.S. corporation on which no U.S. tax was withheld and then paid to a corporation foreign to the U.S. and Virgin Islands is subject to withholding tax under section 1442(a) of the Virgin Islands Code.
ISSUE
Whether interest paid by a Virgin Islands corporation to a foreign corporation is exempt from the Virgin Islands tax collected by withholding under the circumstances described below.
FACTS
FP, a foreign corporation other than a Virgin Islands corporation, organizes FX as a wholly owned subsidiary under the laws of the Virgin Islands. FX in turn acquires all of the stock of Y, a United States corporation. Y is engaged in a manufacturing business in the United States and derives all of its income from sources within the United States. FX is not engaged in a U.S. trade or business. FP is not engaged in trade or business in Virgin Islands. Y pays interest on indebtedness to FX. FX's income for the taxable year consists solely of payments of interest from Y. FX pays interest on indebtedness to FP.
LAW AND ANALYSIS
Section 881(a)(1) of the Internal Revenue Code imposes a tax of 30 percent of the amount received as interest from sources within the United States by a foreign corporation to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States.
Section 1442(a) of the Internal Revenue Code provides that in the case of a foreign corporation subject to tax under subtitle A of the Code there shall be deducted and withheld at the source a tax on certain types of income, including interest. The tax is imposed at a rate of 30 percent.
Section 28(a) of the Revised Organic Act of the Virgin Islands of 1954, as amended (the Act), 48 U.S.C. 1642, provides in part that inhabitants of the Virgin Islands shall satisfy their United States income tax obligation arising under Chapter 1 of the Code by filing a single return with, and paying to, the Virgin Islands the Virgin Islands territorial income tax on income from all sources. A Virgin Islands corporation is an inhabitant of the Virgin Islands. Pursuant to section 28(a) of the Act, no withholding is required upon any item of income paid to any person who, at the time of payment, reasonably expects to satisfy under section 28(a) the United States income tax obligation with respect to that item of income. Rev.Proc. 81-20, 1981-1 C.B. 690, sec. 3.01. Accordingly, interest paid by Y to FX is not subject to the U.S. tax imposed by section 881(a) and no tax should be withheld under section 1442(a) with respect to a taxpayer that complies with the requirements of Rev. Proc. 81-20.
The Naval Service Appropriations Act of 1922, 48 U.S.C. 1397, creates a separate income tax system in the Virgin Islands by applying the income tax laws in force in the United States as the income tax laws of the Virgin Islands. The Internal Revenue Code is generally applied as the Virgin Islands territorial income tax law (Virgin Islands Code) by substituting "Virgin Islands" for "United States" where appropriate in order to give the law proper effect in the Virgin Islands. The Internal Revenue Code and the Virgin Islands Code were enacted by Congress as an integrated scheme of income taxation. The Virgin Islands Code shall not be interpreted to controvert this statutory scheme and allow income from sources within either taxing jurisdiction to escape taxation by both jurisdictions. Rev. Rul. 82-179, 1982-43 I.R.B. 6.
Sections 881(a) and 1442(a) of the Virgin Islands Code provide for the imposition and withholding, respectively, of a Virgin Islands tax of 30 percent of interest received by a foreign corporation from sources within the Virgin Islands.
Section 861(a)(1)(B) of the Internal Revenue Code and sections 1.861-2(b)(2) and 1.861-2(c)(2) of the Income Tax Regulations, as
mirrored for purposes of the Virgin Islands Code, treat as foreign source income interest received from a Virgin Islands corporation where it is shown that less than 20 percent of the gross income from all sources of such corporation has been derived from sources within the Virgin Islands for the 3 year period ending with the close of the taxable year preceding the payment of such interest (or for such part of such period as may be applicable), or, if the Virgin Islands corporation has no gross income for such period, for the taxable year in which the interest is paid.
Section 4a.861-1(a) of the Temporary Income Tax Regulations provides, in part, that for purposes of sections 1.861-2(b)(2) and 1.861-2(c)(2) of the regulations, income of a U.S. corporation derived from sources within the Virgin Islands that is not subject to income tax to the recipient by the Virgin Islands shall be considered income from sources within the United States. When mirrored as the Virgin Islands Code, section 4a.861-1(a) of the temporary regulations provides, in part, that interest income of a Virgin Islands corporation derived from sources within the United States that is not subject to income tax to the recipient shall be considered income from sources within the Virgin Islands for purposes of Virgin Islands Code section 861(a)(1)(B) and sections 1.861-2(b)(2) and 1.861-2(c)(2) of the Income Tax Regulations. Since interest received by FX from Y is not subject to U.S. income tax, it will be treated as income from sources within the Virgin Islands for purposes of applying Virgin Islands Code section 861(a)(1)(B).
HOLDING
Interest paid by FX to FP is Virgin Islands source income and is subject to the 30 percent tax imposed by section 881(a) of the Virgin Islands Code. Such tax must be withheld by FX pursuant to section 1442(a) of the Virgin Islands Code.
FN1. Also released as News Release IR-82-158, dated December 29, 1982.
Rev. Rul. 83-10, 1983-1 C.B. 127.