Foreign corporation's interest subject to withholding under step-transaction doctrine.

• Author: Goldberg, Michael J.

The District of Columbia Circuit held in Del Commercial Properties, Inc., 6/8/01, that a corporation was liable for withholding taxes on interest paid to a related entity; it rejected the assertion that the payments were to another corporation, making them exempt from U.S. withholding.

Del Commercial Properties' principal place of business is in Ontario, Canada. It is a fourth-tier subsidiary of an affiliated group of corporations whose common parent is DL Shekels Holdings Ltd. Delcom Financial is a second-tier subsidiary in the group. Delcom Financial is a Canadian corporation that owns 100% of the outstanding stock of Delcom Holdings, another Canadian corporation. In turn, Delcom Holdings owns 100% of Delcom Cayman (a corporation organized in the Cayman Islands), which owns 100% of the outstanding stock of Delcom Antilles (a corporation organized in the Netherlands Antilles). Delcom Antilles owns 100% of the outstanding stock of Del Investments Netherlands B.V. (Del B.V.), a corporation organized in the Netherlands.

From 1990-1993, Del Commercial Properties' principal business was leasing industrial real estate it owned in the U.S. In 1990, when it needed funding to refinance and improve some of its American properties, one of DL Shekel's first tier subsidiaries, Tridel Corporation, made the financial arrangements. On July 18, 1990, the Royal Bank of Canada loaned $18 million (in U.S. dollars) to Delcom Financial. That same day, Delcom Financial made two unsecured interest-bearing loans to Delcom Holdings. One of those loans was for $14 million. Delcom Holdings then contributed "about $14 million to Delcom Cayman for common shares of stock." On the same day, "Delcom Cayman contributed about $14 million to Delcom Antilles and received common shares of stock in that entity. Later on that same date, Delcom Antilles contributed about $14 million to Del B.V. and received common stock in that entity."

The following day, July 19, Del Commercial Properties borrowed $14 million from Del B.V. That same day, Del Commercial Properties "guaranteed repayment of a portion of amounts owed by Delcom Financial to Royal Bank" and authorized Royal Bank to place a mortgage on its real property in the U.S. It also agreed to provide Royal Bank with "annual financial statements, to insure its real property, to assign the insurance policies to Royal Bank, to defer paying dividends to shareholders, and to use the proceeds from any sales of real property to make...