Foreign-Targeted Bearer Bonds: IRS Issues Transitional Guidance on the Upcoming “Bearer Bond” Repeal

Sullivan & Cromwell LLP - March 8, 2012

On March 7, 2012, the IRS issued Notice 2012-20 (the “Notice”), which provides transitional guidance regarding the upcoming sunset of the U.S. tax law provisions that permit the issuance of “foreign-targeted bearer” obligations. The rules set forth in the Notice will generally be effective for obligations issued after March 18, 2012. The Notice provides guidance on four subjects:

  • First, the Notice clarifies the definition of a “registered” obligation by (i) providing that an obligation will be considered “registered” notwithstanding the fact that a holder may be entitled to definitive certificates in very limited circumstances and (ii) confirming—consistent with many practitioners’ expectations—that “immobilized bearer” obligations will be treated as “registered” for U.S. tax purposes.
  • Second, the Notice provides that issuers of obligations that pay “U.S.-source” interest will be entitled to pay “portfolio interest” (i.e., interest free of U.S. tax withholding) on obligations issued after March 18, 2012 but before January 1, 2014 if those obligations are issued under the “foreign-targeted registered obligation” rules (which had previously been scheduled to be phased-out for obligations issued after the end of 2006 and in some circumstances, the end of 2008). This extension has two significant consequences. First, in contrast to the general “portfolio interest” rules, issuers of “foreign-targeted registered obligations” will be entitled to rely on certifications from nonqualified intermediaries to pay interest without collecting U.S. withholding tax. Second, issuers may not be required to report interest paid on “foreign-targeted registered obligations” on a Form 1042-S.
  • Third, the Notice confirms that the current exemption from information reporting of interest with respect to debt obligations with an original term of 183 days or less (and satisfy certain requirements intended to prevent such obligations from being held by non-exempt U.S. persons) will remain available for obligations issued after March 18, 2012.
  • Fourth, the Notice provides that the excise tax exemption for “foreign-targeted” bearer obligations (which will remain after the other provisions for “foreign-targeted” bearer obligations expire) will be governed by “foreign-targeting” criteria that are identical to the current rules governing “foreign-targeted” obligations (i.e., the current “TEFRA C” and “TEFRA D” rules).

Significantly, the Notice does not extend the March 18, 2012 deadline for issuing “foreign-targeted” bearer obligations.