Bearer or Registered? Lingering Issues Under TEFRA | The Tax Lawyer
Updated: 5 days ago
This article was originally published in Vol. 58, No. 3 (Spring 2005) edition of The Tax Lawyer. The full pdf is linked below, and you can find it in JSTOR.
For many years my practice required me to advise on numerous debt offerings, mostly, but not exclusively, for foreign issuers. Frequently these securities were offered in bearer form to investors outside the United States. Even a foreign offering for a foreign issuer requires U.S. tax advice, since the U.S. tax law imposes significant tax penalties on issuers of bearer debt securities, unless the securities are properly targeted to offshore investors in compliance with U.S. tax regulations.
Two oddities struck me when dealing with this area of the law. First, for U.S. issuers, the law seemed to favor bearer debt, since U.S. issuers were required to obtain withholding tax forms from investors only if the securities were in registered form. This advantage seemed at odds with the policy of discouraging the issuance of bearer debt generally. Second, there was a remarkable lack of clarity regarding when debt was considered to be in bearer form for tax purposes, and some of the most common arrangements for issuing public debt securities fell right in the gray zone.
Except for a helpful summary of the bearer debt restrictions written by Michael Schler, there was virtually nothing written about these rules. This paper was intended to fill that gap, and to address in particular the mysterious lack of clarity regarding whether a particular debt instrument would be treated as bearer or registered. As I wrote the paper, it became clear that what might have been thought of as a dull backwater in the tax law was rich in interpretive issues of practical significance. And in the absence of other in-depth commentary, the paper became a widely consulted resource for practitioners in the field.
There have been several important developments in this area since the paper was published in 2005. The paper was not updated to reflect those developments, so I briefly summarize them here:
In Notice 2006-99, the IRS stated that dematerialized obligations would be treated as registered, even though they would be converted into physical bearer instruments if there was a “meltdown” of the relevant clearing system.
In 2010, Congress finally eliminated the tax advantage to U.S. issuers of bearer debt, by limiting the portfolio interest exemption from U.S. withholding tax to debt issued in registered form.
In Notice 2012-20, the IRS stated that securities issued in global bearer form would be treated as registered for tax purposes, if bearer instruments would be issued to holders only in cases of clearing system meltdown, issuer default, or adverse change in tax law affecting the issuer.
These developments largely resolve the conundrums that originally motivated this paper. Yet the paper remains of continuing relevance to U.S. issuers, who need to avoid issuing debt in bearer form, as well as to foreign issuers, who can continue to issue debt in bearer form, but need to understand when U.S. tax restrictions apply.
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