Tax counsel for securities and financing transactions: how an instrument is characterized, how cash flows are taxed, and how a deal is structured so the tax consequences are understood before it closes.
Interest paid to a foreign lender carries a thirty percent United States withholding tax unless something removes it. The portfolio interest exemption removes it for a note in registered form held by a lender that owns less than ten percent of the borrower's voting power; a bearer instrument gets no exemption. A few lines on a term sheet decide which applies.
Withholding is not the only trap. A discount note accrues interest income to the holder yearly, paid or not, and if the note runs longer than five years at a yield five points or more above the federal rate, part of the issuer's deduction can be deferred or lost. Amend a note so that its yield moves more than a quarter point, or five percent of itself if larger, and the holders have exchanged it for a new one, with gain or loss to them and, if the new issue price is lower, cancellation-of-debt income to the issuer.
We draft to these rules for issuers, lenders and investors, write the offering document's tax section, and represent clients in matters before the IRS when a characterization is tested.
Tax planning for equity and debt offerings and other capital markets activities, analyzing how an offering is characterized and how that treatment affects timing, income, and reporting for issuers and investors.
Tax structuring for derivatives and other financial instruments, with attention to how each instrument is classified and how that classification drives the recognition of income and the treatment of payments.
Analysis of how an instrument is treated for tax purposes, as debt, equity, or a hybrid, and how that characterization changes deductibility, income recognition, and withholding for the parties involved.
Tax structuring for project and structured finance transactions, with their special-purpose entities, layered financing, and long-dated cash flows, coordinated with the corporate, securities, and finance teams running the deal.
Counsel on the cross-border tax consequences of financings: withholding on interest and other payments, treaty considerations, and the interaction of U.S. rules with other jurisdictions, coordinated with local counsel where their law applies.
Selection of the entities and structures through which a financing is carried out, with the tax treatment of the structure and the allocation of tax attributes addressed before terms are set.
Guidance on the withholding and information-reporting obligations that attach to financing payments and securities transactions, so the obligations are mapped and met as part of the deal itself.
Representation in matters before the IRS where a transaction's tax treatment is examined, together with the contemporaneous analysis and documentation that support a position should it later be reviewed.
Section 385 lets the Treasury write a test, and its regulations reach only certain related-party debt, so for everyone else the question is decided on factors: a fixed maturity, an unconditional promise to pay, and whether an unrelated lender would have made the loan. Thin capitalization and payments tied to profits push toward equity.
A discount note's holder includes OID each year on a constant-yield basis, and the issuer deducts on the same schedule, cash or no cash. If the payments are contingent, the noncontingent bond method sets a comparable yield and taxes the holder on it, with adjustments when actual payments arrive. Model the economics after tax.
The portfolio interest exemption and every treaty rate exist only on paper in the payer's file: a Form W-8BEN or W-8BEN-E from the holder, valid three calendar years, and a W-8IMY where an intermediary stands between. Without a valid form the paying agent withholds thirty percent and the payee waits a year for a refund.
A borrower's net business interest deduction is capped at thirty percent of adjusted taxable income, computed on an EBITDA basis for tax years beginning after 2024, with the excess carried forward. Electing real property businesses and companies under the gross-receipts threshold are outside it. The ceiling belongs in the model of any leveraged structure.
Periodic swap payments accrue over the period they cover, not when paid; a nonperiodic payment, such as an upfront fee, is spread over the contract's life, and a significant one is treated as an embedded loan. A total return swap over a United States stock also pays dividend equivalents, withheld upon like the dividend itself.
The issuer's characterization of an instrument as debt or stock binds the issuer and every holder, though not the IRS, unless a holder discloses a contrary position on its return. The offering document's tax section declares that characterization, so it is drafted as an opinion, not boilerplate, stating the intended treatment and its risk.
Before the term sheet hardens, we test the instrument's tax identity as debt, equity, or hybrid, and as forward, option, or notional principal contract, because that identity will govern timing, deductibility, and withholding for every party, whatever the cover page calls it.
We route the deal through the right entities and jurisdictions: special-purpose vehicles selected, each payment leg traced for withholding exposure, treaty positions confirmed, and the allocation of tax attributes settled while the terms can still move.
The tax analysis is written into the deal: indenture and swap terms drafted to hold the intended characterization, the offering document's tax section prepared, and reporting and withholding mechanics wired into the payment provisions before signing.
At closing the position is memorialized, with the contemporaneous analysis filed alongside the executed documents, so that if the IRS later examines the treatment the record built on day one carries the position. We stand behind it through examination.
An instrument is taxed for what it is rather than for what it is called, so we settle what it is before anyone signs.
Three questions, asked of every instrument: whether it is debt or equity, when and to whom its income is recognized, and whether any payment is withheld upon when it crosses a border. Reporting follows from the answers. The instruments run from senior notes and convertibles to swaps and securitization tranches, but the questions do not change, and the answers are set by the documents rather than the pricing.
Because the label on an instrument does not always control its tax treatment. Whether something is treated as debt or equity, or how a derivative or hybrid instrument is classified, can change when income is recognized, whether payments are deductible, and what withholding and reporting obligations apply. Getting the characterization right at the structuring stage is generally far less costly than addressing it after the fact.
They add a thirty percent withholding tax on United States-source interest paid to a foreign lender unless the portfolio interest exemption or a treaty applies, and most loan agreements make the borrower gross up whatever is withheld. The exemption requires a note in registered form, a lender holding under ten percent of the borrower's vote, and a valid withholding certificate on file; a bank lending in the ordinary course cannot use it and needs a treaty instead. We confirm which route each lender has before the rate is set.
Yes. The first question in a securitization or project financing is what the issuing vehicle is for tax purposes, and the answer is a choice made on Form 8832 or by default, not a label. A vehicle issuing debt in more than one maturity backed by real estate mortgages is taxed as a corporation unless it qualifies and elects as a REMIC; a vehicle that is a partnership passes its income through, with a K-1 and withholding for every foreign holder. We pick the vehicle for the investors it will actually have, then draft the waterfall to the choice.
Yes. Where the tax treatment of a securities or financing transaction is examined or challenged, we represent clients in matters before the IRS, from examination through administrative resolution, and coordinate with our tax controversy practice when a dispute escalates. We also build the contemporaneous documentation and analysis that support a position should it later be reviewed.
Before the term sheet circulates, because the terms that carry the tax are the ones nobody revisits: the form of the instrument, its yield and maturity, and who the lenders are and where they sit. After signing, the choices narrow to disclosure and defense. A tax read of a two-page term sheet is a short exercise; unwinding a bearer note sold to a foreign fund is not.
Tax structuring for business combinations, asset and stock acquisitions, and corporate restructurings, coordinated with the deal team from term sheet through closing.
Explore →Multi-state tax planning and compliance, including nexus analysis, apportionment, and state and local tax controversy across jurisdictions.
Explore →Representation in matters before the IRS and state tax authorities in examinations, administrative appeals, and tax litigation.
Explore →Reviewed by Jonathan D. Herpy, Sr., Senior Partner · Last updated October 2026 · Educational overview · Not legal advice
One partner is accountable for the whole matter, and you have that partner's direct line. Chicago, London, and Dubai work to the same standard.