Tax deduction for the borrower, tax-free income for the lender.

In a one-hour live, online workshop, I will show you how the magic works so you can do it yourself.

There’s also a special bonus for attending the workshop. I’m doing a Big Thing in a few months, and people who attend this workshop are first in line for it. 

More on that below.

What is portfolio interest?

Portfolio interest is interest on a loan – with a twist. There is a loan, and the borrower pays interest on that loan to a foreign lender. 

If you configure the loan correctly, you add an adjective: portfolio. The interest income received by the foreign lender becomes portfolio interest income.

Usually, a foreign lender’s interest income is taxed at normal income tax rates (if the lender runs a U.S. business making loans). (That’s “effectively connected income” for you tax nerds. I self-identify as a tax nerd.) 

Let’s not talk about lenders actively engaged in business in the United States. 

Let’s talk about opportunistic lending opportunities, usually between related parties—one-off loans. A foreign lender pays a 30% tax on interest income from U.S. borrowers. (FDAP income for the tax nerd crowd.) The borrower has a withholding job:

• Take 30% of the interest payment.
• Send it to the IRS.
• Send the rest to the foreign lender. 

That’s on regular interest paid.

But portfolio interest? Zero per cent tax rate. And no tax withholding is required.

Typical scenarios

When would you do this? Here are two scenarios I see frequently:

• A nonresident parent lends money to a U.S.-resident child to buy a personal residence.
• A nonresident investor prepared to pay all cash will instead put 20% down and borrow 80% from himself to buy U.S. investment real estate.

The magic hides in plain sight

I hate to undersell this, but this is just cooking. Follow the cake recipe, and bake a cake.

Internal Revenue Code Sections 871(h) (for foreign individual lenders) and 881(c) (for foreign corporation lenders) are where you find the recipe, plus the Treasury Regulations, of course.

Topics we will cover

In this workshop, I will demystify the magic and show you – directly from the Code and Regulations – how to do portfolio interest lending correctly. How do you choose the right borrower and the right lender? What should the loan documents say? What is the required tax paperwork?

You're also going to get something else.

I will be forming a group in a few months. People who attend the portfolio interest workshop will have the first opportunity to join.

I talk to a lot of you. (And if you're reading this and we haven't spoken – by email, on Zoom, or in person – please fix that and shoot me an email.)

We are scattered all over the world, often working alone. Even those in a firm are usually the only international tax specialists, so you're alone in a crowd.

We need people to brainstorm with, to sanity-check us, or to mentor us. We're lonely.

Well, that's my experience, at least. From my conversations with many of you, it is the experience of many people who practice international tax.

I want to make a small dent in this problem.

What you'll get as a member

At the moment, I am putting together the plans for a small community of practitioners. The details are still being ironed out so the below is subject to change, but here's what I'm thinking so far: