Rev. Rul. 66-27

Advice has been requested regarding the proper treatment of deposits in less developed countries with persons carrying on the banking business and the income from such deposits, in determining whether a foreign corporation qualifies as a less developed country corporation as defined in section 4916(c)(1)(B) of the Internal Revenue Code of 1954.

As far as here pertinent, the foreign corporation has assets consisting of deposits with persons carrying on the banking business in foreign countries and the income from such deposits as shown in the following schedule.

                               SCHEDULE A

Examination of Schedule A, above, giving effect to the provisions of section 4916(c)(1)(B) of the Code, shows that, of the total assets amounting to 763 x dollars, 7 x dollars is a qualifying asset and represents only 1 percent of the total assets. On the other side, the only income qualifying is 1 x dollars, representing only 3 percent of the total income of 30 x dollars.

However, section 4916(c)(2)(C) of the Code contains a special rule which provides that, in making the computations with respect to the status of a foreign corporation as a less developed country corporation as defined in section 4916(c)(1)(B) of the Code, deposits outside the United States (other than deposits in a less developed country) with persons carrying on the banking business, and income from such deposits, shall not be taken into account. Also, see section 147.3-1(b)(2)(ii)(b) and (iii)(c) of the temporary regulations under the Interest Equalization Tax Act.

Section 4916(b) of the Code provides, in part, that the term `less developed country' means any foreign country (other than an area within the Sino-Soviet bloc) or any possession of the United States with respect to which there is in effect an Executive Order by the President designating such country as an economically less developed country for purposes of the interest equalization tax. Under applicable Executive Orders (Executive Order 11071, dated Dec. 27, 1962, C.B. 1963-1, 137; and superseding Executive Order 11224, dated May 13, 1965, C.B. 1965-1, 507) Liberia has been an economically less developed country since the tax has been in effect. On the other hand, under the limitations imposed by section 4916(b) of the Code, the United Kingdom (of which Great Britain is a part) and Sweden cannot be so designated by the President.

Applying the special rule of section 4916(c)(2)(C) of the Code to the 80 percent of gross income and 80 percent of assets tests under section 4916(c)(1)(B) of the Code, it is clear that in determining the ratio of qualifying assets to total assets and of qualifying income to total income the deposits of 221 x dollars in Sweden and 260 x dollars in Great Britain, together with the respective amounts of income thereon of 10 x dollars and 11 x dollars, are to be excluded from the amounts of qualifying and total assets and income, respectively, since the deposits are located outside the United States (other than in a less developed country). It is equally clear that the deposit of 7 x dollars in the United States and the income of 1 x dollars thereon are to be included in such amounts since both the asset and the item of income are specifically qualified under section 4916(c)(1)(B) of the Code.

Based upon the above, the only deposits and the income therefrom not to be taken into account are those of Sweden and Great Britain. This may be illustrated as follows, using the figures shown in Schedule A, above.

                              SCHEDULE B

With respect to the treatment of the deposit of 275 x dollars in Liberia and the income of 8 x dollars from such deposit, which are included in the above schedule as part of total assets and also of total income, respectively, the question arises whether a deposit in a less developed country with a person carrying on the banking business and the income thereon are also to be included as qualifying assets and income.

While section 4916(c)(2)(C) of the Code provides that deposits outside the United States with persons carrying on the banking business, and the income from such deposits, shall not be taken into account, this provision specifically provides that such treatment is not applicable to deposits in a less developed country. Therefore, deposits in a less developed country and the income from such deposits must be fully taken into account in some manner.

The question is whether such deposits and income should be taken into account as qualifying or nonqualifying assets and income. Although section 4916(c)(1)(B)(i) of the Code refers only to deposits in the United States with persons carrying on the banking business, section 4916(c)(1)(B)(ii), (iii), (iv), and (v) of the Code amply demonstrate a congressional intention to accord favorable treatment of less-developed-country oriented assets of holding companies. It would not be consistent with this intention to treat bank deposits actually located in less developed countries and income from such deposits as an impediment to qualification as a less developed country corporation.

Accordingly, in view of the foregoing, it is held that in making the computation of the 80 percent of assets test pursuant to the provisions of section 4916(c)(1)(B) and 4916(c)(2)(C) of the Code, in order to make the determination whether a foreign corporation qualifies as a less developed country corporation for purposes of the interest equalization tax, deposits in less developed countries with persons carrying on the banking business are to be included in both qualifying assets and total assets. Likewise, in making the computation of the 80 percent of gross income test pursuant to sections 4916(c)(1)(B) and 4916(c)(2)(C) of the Code, for purposes of such determination, income from such deposits is to be included in both qualifying income and total income.

The above may be illustrated by the following, using the appropriate figures shown in Schedules A and B, above.

7x plus 275x (Liberia) 282x