Rev. Rul. 77-482

Advice has been requested whether the East Caribbean Currency Authority, that is owned by more than one foreign government and was established to issue and manage a common currency on behalf of those governments, is exempt from Federal income taxation under either section 892 or 895 of the Internal Revenue Code of 1954.

The East Caribbean Currency Authority (the "Authority"), is a financial organization wholly owned and controlled by the foreign governments participating in the East Caribbean Currency Agreement of 1965 as amended (the "Agreement"). The Authority was established under the Agreement to issue and manage a common currency on behalf of the participating governments. The provisions of the Agreement have been given legal effect in the participating countries by passage of currency ordinances. To back the currency it circulates, the Authority invests in the securities of participating governments and other nations, in fixed deposits and money at call in banks outside the participating countries (including the Federal Reserve Bank of the United States), and in other passive investments, such as currencies, fixed interest-deposits, stocks, bonds, notes, or other securities evidencing loans. Under the Agreement, the Authority is not permitted to hold a direct interest in any commercial, agricultural, industrial, or other undertaking. The Authority does not engage in or conduct any commercial banking functions or any other commercial activities.

The assets and income of the Authority are derived solely from its activities and investments and from the participating foreign governments. The net profits of the Authority are distributed to the participating foreign governments in accordance with the Agreement. The investments of the Authority in the United States include only those that produce passive income.

Section 892 of the Code provides, in part, that the income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments shall not be included in gross income and shall be exempt from Federal income taxation.

Section 895 of the Code provides, in part, that income derived by a foreign central bank of issue from obligations of the United States or any other agency or instrumentality thereof that are owned by such foreign central bank of issue, or derived from interest on deposit with persons carrying on the banking business, shall not be included in gross income and shall be exempt from Federal income taxation. However, section 895 further provides that such income will not be exempt from Federal income taxation if such obligations or deposits are held for, or used in connection with, the conduct of commercial banking functions or other commercial activities.

Section 1.895-1(b) of the Income Tax Regulations defines a foreign central bank of issue as a bank that is by law or government sanction the principal authority, other than the government itself, issuing instruments intended to circulate as currency. Section 1.895-1(b) also provides that the exclusion granted by section 895 applies to an instrumentality separate from a foreign government, whether or not wholly owned by a foreign government (emphasis added). See also S. Rep. No. 163, 87th Cong., 1st Sess., 1961-2 C.B. 351.

Rev. Rul. 68-309, 1968-1 C.B. 338, provides that an international body formed by a number of foreign countries may qualify for an exemption under section 892 of the Code where such body collectively constitutes a foreign government within the meaning of section 892. Under Rev. Rul. 68-309, whether this body constitutes a foreign government for purposes of section 892 depends on whether it is empowered to exercise independently substantial governmental powers binding on the member countries.

Rev. Rul. 77-41, 1977-1 C.B. 226, holds that a foreign organization that is wholly owned by more than one foreign government and cannot independently exercise any substantial governmental powers binding on its member countries is neither a foreign government nor an international organization within the meaning of sections 892 and 893 of the Code.

Based on the foregoing facts, the Authority is not considered to be empowered to exercise independently substantial governmental powers binding on the participating countries. Accordingly, the Authority is not a foreign government within the meaning of Rev. Rul. 68-309. Further, pursuant to Rev. Rul. 77-41, the Authority is not entitled to exemption from Federal income tax under section 892 of the Code.

However, the Authority is considered to be a foreign central bank of issue since it is by law the principal authority issuing instruments intended to circulate within the participating countries as currency. Furthermore, the Authority does not engage in or conduct any commercial banking functions or other commercial activities.

Accordingly, the Authority is taxable on its United States source income except that income derived by the Authority from obligations of the United States or any agency or instrumentality thereof or from deposits with persons carrying on the banking business is exempt from Federal income taxation under section 895 of the Code. Further, the withholding agent is required to withhold under section 1.1441-1 of the regulations except upon the income exempt from tax under section 895 of the Code under the circumstances described in section 1.1441-4(i).