US Tax withholding for interest payment on loans obtained in India
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quantumleap
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US Tax withholding for interest payment on loans obtained in India
Link to original thread: US Tax withholding for interest payment on loans obtained in India
I am planning to purchase real estate in India. I am told that if I get a loan from a bank in India (like ICICI), they will do the due diligence on making sure the Title is clean etc. so I see general recommendation to use a loan to buy property.
I know that we can deduct the interest on this loan in the US, just like any other mortgage interest.
But I am wondering about any Tax holding obligations that I am liable for.
From what I understand, from the publication 515
http://www.irs.gov/pub/irs-pdf/p515.pdf
the interest that I pay to the bank is considered as earnings for the bank from a US source, this means the bank owes taxes to US IRS, and the payer (me) is responsibile (personally liable) for withholding tax (NRA withholding) on the interest payments that are made to the bank.
The withholding party needs to also file other IRS Forms ((I think 1042) to report this withholding.. and probably issue other forms to the interest reciever indicating amount withheld..
Do the Indian banks handle all these automatically, may be CITI NRI simplifies this process as well (I know CITI-NRI issues 1099 for interest we earn in India)..
If CITI or other Indian bank don't help with this, it seems too burdensome to use a loan to purchase the property, if we plan to pay interest through NRE account..
Are there others (US residents) that have purchased homes in India with a loan from an Indian bank that has dealt with this..
Thanks
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
#1:
Three deliveries and second googly/chinaman within the space of 1-2 days, the first in
US Taxes PFIC rules for investment in india mutual funds..
http://groups.msn.com/R2INRIFinanceAndInvestments/banking.msnw?action=get_message&mview=0&ID_Message=45972&LastModified=4675553528354216171&all_topics=1
In between, one well bowled ball was played well by bmukherji at
US DOT requirement to report foreign Bank accounts
http://groups.msn.com/R2INRIFinanceAndInvestments/banking.msnw?action=get_message&mview=0&ID_Message=45996&LastModified=4675553418195611245&all_topics=1
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Now coming to the googly/chinaman in this particular thread:
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http://www.bankrate.com/gookeyword/itax/tax_adviser/20020515a.asp
Extract
Now comes the complicated part. As a U.S. resident, you may be required to withhold U.S. income tax on payments made to a foreign person, such as a bank that provides you the mortgage on the London home. Internal Revenue Service Publication 515 provides extensive rules on the obligation of U.S. persons to withhold tax on payments to foreign persons.
Payments of interest by a U.S. taxpayer to a foreigner are considered U.S. source income and are subject to income tax withholding of 30 percent, unless a lower rate applies by treaty.
Based on this, you could imagine that a lender who knows that you are a U.S. taxpayer would be reluctant to provide you a mortgage, even if a lower treaty rate applies. If you fail to withhold tax, you could be personally liable for the tax. If you fail to pay the lender the full amount of the mortgage payment, you could be in default.
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Preliminary Thoughts
AFAIK, interest paid by an individual US resident is US-source interest, even if such interest is paid from a Swiss-bank account or even if such interest is on a personal loan taken in Brunei.
Per the Article on "interest" of the India-US tax treaty, the max tax that IRS can charge on US source interest to a bank that is an Indian resident is 10%.
Whether the Indian bank has a fixed base or permanent establishment in the US, and whether such interest can be attributed to that fixed base or permanent establishment may also be a relevant factor.
ICICI has a representative office in NY (with permission from the US Fed) to facilitate, among other things, ICICI soliciting business from NRI customers resident in the US. SBI has branches in US.
Article 11 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed :
(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; and
(b) 15 per cent of the gross amount of the interest in all other cases
Three deliveries and second googly/chinaman within the space of 1-2 days, the first in
US Taxes PFIC rules for investment in india mutual funds..
http://groups.msn.com/R2INRIFinanceAndInvestments/banking.msnw?action=get_message&mview=0&ID_Message=45972&LastModified=4675553528354216171&all_topics=1
In between, one well bowled ball was played well by bmukherji at
US DOT requirement to report foreign Bank accounts
http://groups.msn.com/R2INRIFinanceAndInvestments/banking.msnw?action=get_message&mview=0&ID_Message=45996&LastModified=4675553418195611245&all_topics=1
------------------
Now coming to the googly/chinaman in this particular thread:
----------------
http://www.bankrate.com/gookeyword/itax/tax_adviser/20020515a.asp
Extract
Now comes the complicated part. As a U.S. resident, you may be required to withhold U.S. income tax on payments made to a foreign person, such as a bank that provides you the mortgage on the London home. Internal Revenue Service Publication 515 provides extensive rules on the obligation of U.S. persons to withhold tax on payments to foreign persons.
Payments of interest by a U.S. taxpayer to a foreigner are considered U.S. source income and are subject to income tax withholding of 30 percent, unless a lower rate applies by treaty.
Based on this, you could imagine that a lender who knows that you are a U.S. taxpayer would be reluctant to provide you a mortgage, even if a lower treaty rate applies. If you fail to withhold tax, you could be personally liable for the tax. If you fail to pay the lender the full amount of the mortgage payment, you could be in default.
-------------
Preliminary Thoughts
AFAIK, interest paid by an individual US resident is US-source interest, even if such interest is paid from a Swiss-bank account or even if such interest is on a personal loan taken in Brunei.
Per the Article on "interest" of the India-US tax treaty, the max tax that IRS can charge on US source interest to a bank that is an Indian resident is 10%.
Whether the Indian bank has a fixed base or permanent establishment in the US, and whether such interest can be attributed to that fixed base or permanent establishment may also be a relevant factor.
ICICI has a representative office in NY (with permission from the US Fed) to facilitate, among other things, ICICI soliciting business from NRI customers resident in the US. SBI has branches in US.
Article 11 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State.
2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed :
(a) 10 per cent of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution (including an insurance company) ; and
(b) 15 per cent of the gross amount of the interest in all other cases
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quantumleap
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US Tax withholding for interest payment on loans obtained in India
Just to make sure:
Pub 515 calls for 30% withholding, per domestic US tax law.
Treaty provisions, where applicable and where the US savings clause (applicable to income of USC) does not play in, override domestic tax law.
Pub 515 calls for 30% withholding, per domestic US tax law.
Treaty provisions, where applicable and where the US savings clause (applicable to income of USC) does not play in, override domestic tax law.
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
rom: 
RKS1972Sent: 12/28/2005 8:51 AM I called the customer service for ICICI to ask them about this, they weren't familiar with the tax rules. They suggested that I send mail to nri services and may be some tax specialist can provide input.. I have sent them a request, I will post the responses I get..
RKS1972Sent: 12/28/2005 8:51 AM I called the customer service for ICICI to ask them about this, they weren't familiar with the tax rules. They suggested that I send mail to nri services and may be some tax specialist can provide input.. I have sent them a request, I will post the responses I get..-
quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
#4: Glad you did not waste much time with customer service.
If no definite info emerges, I will contact people I know (or rather people that know me - e.g. many may know Sonia Gandhi, yet what is important to a person is whether she knows that person or not
) in ICICI. Dont want to bother them now. I have taken an ICICI loan on an India property, have withheld nothing (did not know better) and have a personal interest in this thread.
I believe many USCs own real estate in Canada, have taken loans from Canadian banks for the same, yet probably have never thought about withholding tax on interest payments to those Candadian banks. That does not mean they are right, just suggestive that there may be some exception. The relevant article (Interest) of US-Canada tax treaty does not seem that different from that of the US-India tax treaty.
http://www.intltaxlaw.com/treaties/canada/treaty.htm#CaArticle%20XI
If no definite info emerges, I will contact people I know (or rather people that know me - e.g. many may know Sonia Gandhi, yet what is important to a person is whether she knows that person or not
) in ICICI. Dont want to bother them now. I have taken an ICICI loan on an India property, have withheld nothing (did not know better) and have a personal interest in this thread.I believe many USCs own real estate in Canada, have taken loans from Canadian banks for the same, yet probably have never thought about withholding tax on interest payments to those Candadian banks. That does not mean they are right, just suggestive that there may be some exception. The relevant article (Interest) of US-Canada tax treaty does not seem that different from that of the US-India tax treaty.
http://www.intltaxlaw.com/treaties/canada/treaty.htm#CaArticle%20XI
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
Extracts From Pub 515
Withholding exemption. Generally, you do not need to withhold tax on income if you receive a Form W-8ECI on which a foreign payee represents that:
Income paid to U.S. branch of foreign bank or insurance company.
A payment to a U.S. branch of a foreign bank or a foreign insurance company that is subject to U.S. regulation by the Federal Reserve or state insurance authorities is presumed to be effectively connected with the conduct of a trade or business in the United States unless the branch provides a Form W-8BEN or Form W-8IMY for the income. If a U.S. branch of a foreign bank or insurance company receives income that the payer did not withhold upon because of the presumption that the income was effectively connected with the U.S. branch's trade or business, the U.S. branch is required to withhold on the income if it is in fact not effectively connected with the conduct of its trade or business in the United States. Withholding is required whether the payment was collected on behalf of other persons or on behalf of another branch of the same entity.
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As already mentioned, ICICI has a representative office in the US (with US Fed approval).
Withholding exemption. Generally, you do not need to withhold tax on income if you receive a Form W-8ECI on which a foreign payee represents that:
The foreign payee is the beneficial owner of the income,
The income is effectively connected with the conduct of a trade or business in the United States, and
The income is includible in the payee's gross income.
Income paid to U.S. branch of foreign bank or insurance company.
A payment to a U.S. branch of a foreign bank or a foreign insurance company that is subject to U.S. regulation by the Federal Reserve or state insurance authorities is presumed to be effectively connected with the conduct of a trade or business in the United States unless the branch provides a Form W-8BEN or Form W-8IMY for the income. If a U.S. branch of a foreign bank or insurance company receives income that the payer did not withhold upon because of the presumption that the income was effectively connected with the U.S. branch's trade or business, the U.S. branch is required to withhold on the income if it is in fact not effectively connected with the conduct of its trade or business in the United States. Withholding is required whether the payment was collected on behalf of other persons or on behalf of another branch of the same entity.
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As already mentioned, ICICI has a representative office in the US (with US Fed approval).
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quantumleap
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- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
http://www.findarticles.com/p/articles/mi_m4126/is_4_88/ai_85177361
Extracts
Orders issued under International Banking Act - Legal Developments
ICICI Bank Limited Mumbai, India
Order Approving Establishment of a Representative Office
ICICI Bank Limited ("Bank"), Mumbai, India, a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 10(a) of the IBA (12 U.S.C. [section] 3107(a)) to establish a representative office in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the Board to establish a representative office in the United States...
The proposed representative office is intended to facilitate Bank's business in cross-border loans and increase its share of nonresident Indian deposits by promoting Bank's products and services to existing and potential customers in the United States. The proposed office will engage in soliciting loans and executing loan documents, soliciting purchasers of loans and parties to contract for the servicing of loans, conducting research, and acting as a liaison with Bank's customers and correspondents.
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Based on the above, it appears that interest earned by ICICI on India home loans given by ICICI to US residents would be income effectively connected with the conduct of a US trade/business.
Extracts
Orders issued under International Banking Act - Legal Developments
ICICI Bank Limited Mumbai, India
Order Approving Establishment of a Representative Office
ICICI Bank Limited ("Bank"), Mumbai, India, a foreign bank within the meaning of the International Banking Act ("IBA"), has applied under section 10(a) of the IBA (12 U.S.C. [section] 3107(a)) to establish a representative office in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the Board to establish a representative office in the United States...
The proposed representative office is intended to facilitate Bank's business in cross-border loans and increase its share of nonresident Indian deposits by promoting Bank's products and services to existing and potential customers in the United States. The proposed office will engage in soliciting loans and executing loan documents, soliciting purchasers of loans and parties to contract for the servicing of loans, conducting research, and acting as a liaison with Bank's customers and correspondents.
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Based on the above, it appears that interest earned by ICICI on India home loans given by ICICI to US residents would be income effectively connected with the conduct of a US trade/business.
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
#6,7
These details look good, so hopefully ICICI handle the Tax issues on loans for us.. i will see if they provide any confirmation to this effect.
I don't know if these mean anything, but the links below say that the rep office in NY doesn't offer NRI Banking and Money Transfer services..although they do indicate that they act as liaisons with customers and correspondents of ICICI Bank, India..
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/usa.htm
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/contact_us.htm
These details look good, so hopefully ICICI handle the Tax issues on loans for us.. i will see if they provide any confirmation to this effect.
I don't know if these mean anything, but the links below say that the rep office in NY doesn't offer NRI Banking and Money Transfer services..although they do indicate that they act as liaisons with customers and correspondents of ICICI Bank, India..
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/usa.htm
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/contact_us.htm
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
#8: Thanks for those links, your diligence and circumspection which I believe have and will be an asset to this forum.
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http://icicibank.com/Pfsuser/icicibank/ibank-nri/nrinewversion/home_usahome_popup.htm
This link may allow you to access icicibank.com/nri website. The New York Representative office does not offer NRI products and services and has no control over the linked website, and is not liable for the use of it.
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http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/contact_us.htm
Please Note: USA Representative office does not offer NRI services. This office will not accept documents pertaining to NRI Banking Services in India offered by ICICI Bank. For couriering documents related to such services, please use the following address.
NRI Services Center
ICICI Bank Ltd., INDIA
C/O G3 Worldwide
BLR/ FRG/ 24390/002
P.O. Box 9018
Jericho NY 11753-8918
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http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/usa.htm
Setup in June 2002, the Representative office carries out the following activities:
1. Liaisoning with customers and correspondents of ICICI Bank, India 2. Conducting research on behalf of ICICI Bank, India 3. Soliciting loans above USD 250,000 on behalf of ICICI Bank, India, and executing any process associated with the same.
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http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/disclaimer_USA.htm
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http://icicibank.com/Pfsuser/icicibank/ibank-nri/nrinewversion/home_usahome_popup.htm
This link may allow you to access icicibank.com/nri website. The New York Representative office does not offer NRI products and services and has no control over the linked website, and is not liable for the use of it.
--------------------
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/contact_us.htm
Please Note: USA Representative office does not offer NRI services. This office will not accept documents pertaining to NRI Banking Services in India offered by ICICI Bank. For couriering documents related to such services, please use the following address.
NRI Services Center
ICICI Bank Ltd., INDIA
C/O G3 Worldwide
BLR/ FRG/ 24390/002
P.O. Box 9018
Jericho NY 11753-8918
---------------
http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/usa.htm
Setup in June 2002, the Representative office carries out the following activities:
1. Liaisoning with customers and correspondents of ICICI Bank, India 2. Conducting research on behalf of ICICI Bank, India 3. Soliciting loans above USD 250,000 on behalf of ICICI Bank, India, and executing any process associated with the same.
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http://www.icicibank.com/pfsuser/icicibank/ibank-nri/nrinewversion/disclaimer_USA.htm
Disclaimer for Products available in India for NRIs in USA
All Rupee Deposits, Easy Rupee Accounts, and FCNR deposits made at any branch of ICICI Bank Limited, are subject to Reserve Bank of India ("RBI") rules and other applicable Indian laws and regulations. All deposits are payable only at the branch of ICICI Bank Limited where the deposit is made. Repayment of deposits will be subject to any act beyond the control of the bank including any act of the state, political disputes, civil commotion, war, expropriation or unrest or any other cause beyond reasonable control of the paying branch of ICICI Bank Limited. Deposits are not insured by the FDIC or CDIC or any other insurance corporation outside India. The products described above are not protected against sovereign risk including risks arising from any changes in the laws in India. For Non U.S. dollar deposits and Investments, the U.S. dollar equivalent of your principal and interest can increase or decrease, depending on foreign exchange fluctuations and the timing of your decision to convert between currencies. Account maintenance and transaction fees for any of the accounts / deposits can change from time to time based on the sole discretion of ICICI Bank Limited." Online remittances made through "Money 2 India" are governed by the RBI and Indian banking regulations and not by U.S. regulatory agencies. Charges for remittance services are subject to change from time to time at the sole discretion of the ICICI Bank Limited. Any reference to the time of delivery or other service levels are only indicative and should not be construed to refer to any commitment by ICICI Bank Limited or any other service provider. The service levels are subject to variations depending on several factors, including without limitation, the clearing house network, the other service provider etc. Mortgage loans are available only to purchase residential properties located in India. Mortgage loans are not available to finance the purchase of residential properties located in the United States. Terms of mortgage loans are governed by applicable Indian laws and are not subject to U.S. laws or regulations. Approval of a particular mortgage loan is subject to due diligence and credit review and is at the sole discretion of ICICI Bank Limited and its applicable credit policies as well as applicable Indian regulations. ICICI Bank Limited maintains its head office in Mumbai, India. The information provided herein is not intended for distribution to, or use by, any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject ICICI Bank Limited or its affiliates to any licensing or registration requirements." *Interest rates cited as examples of rates which may be in effect from time to time are indicative rates only and are subject to change at any time at the sole discretion of ICICI Bank Limited or its affiliates, as the case may be, and applicable Indian laws.
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The key question in my mind is whether interest earned by ICICI on an NRI home loan (on Indian property) given to a US resident is income effectively connected (ECI) with the conduct of a US trade/business or not. The disclaimers above could well be a measure to protect ICICI against suits based on US laws, even though such interest is ECI for US tax purposes.
Will contact ICICI as a last resort.
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quantumleap
- Posts: 131
- Joined: Tue Jan 23, 2007 4:11 pm
US Tax withholding for interest payment on loans obtained in India
" I am told that if I get a loan from a bank in India (like ICICI), they will do the due diligence on making sure the Title is clean etc. so I see general recommendation to use a loan to buy property."
--> Thats incorrect. ICICI, HDFC has approved many sites which had no approvals from authorities at all. They are all under competition to give more loans. Govt Banks like SBI due better jobs scrutinising than private banks. At the end of the day, there is no substitution for your own due diligence.
--> Thats incorrect. ICICI, HDFC has approved many sites which had no approvals from authorities at all. They are all under competition to give more loans. Govt Banks like SBI due better jobs scrutinising than private banks. At the end of the day, there is no substitution for your own due diligence.