Foreign loan vehicle's participation income is not effectively connected income

Plain-English summary

An international development organization planned to create a foreign corporation that would buy participations in its loans and finance those assets by issuing rated notes and subordinated interests. The organization would remain lender of record, service the loans, retain substantial portions for itself, and preserve authority to modify them according to its development mission. The foreign vehicle would have no United States office unless the organization's office were attributed to it, and an independent administrator would hold the participations and distribute collections to investors. The IRS concluded that the vehicle's foreign-source interest and gain from the participations would not be effectively connected with a United States trade or business. Its analysis emphasized the entities' legal and economic independence, the organization's dealings as principal, its retained decision rights, and the use of independent financial institutions. The ruling expressly does not decide whether the foreign vehicle is engaged in a United States trade or business.

Ruling snapshot

• Question: Is a foreign securitization vehicle's income and gain from loan participations effectively connected with a United States trade or business?
• Outcome: Approved, the participation income and gain are not treated as effectively connected income
• Key authorities: IRC §§ 864(c), 865(e), 882(a); Treas. Reg. §§ 1.864-4 through 1.864-7

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202536015                                              Third Party Communication: None
 Release Date: 9/5/2025                                         Date of Communication: Not Applicable
 Index Number: 864.02-00
                                                                Person To Contact:
 ------------------------------------------------------------   ----------------, ID No. -----------------
 -----------------------                                        Telephone Number:
 ---------------------------------------                        --------------------
 ------------------------                                       Refer Reply To:
 ----------------------------------------                       CC:INTL:B05
 -----------------------------------------                      PLR-107765-25
                                                                Date:
                                                                June 9, 2025




LEGEND

X                          = -----------------
Entity 1                   = -----------------------------------------------------------------------------
                             -----------------------------------------------------------------------------
                             --------------------------------------------------
Originator                 = --------------------------------------------
Country A                  = ----------------------
Prior Ruling               = ----------------------------------------------
Date 1                     = ----------------------
Period of Time 1           = ------------
Period of Time 2           = ------------
Number of Loans 1          = ---
Number of Loans 2          = -----
Amount of Participations 1 = ----------------
Amount of Participations 2 = ----------------
Number of Investors 1      = ---
Number of Investors 2      = -----
Par Amount                 = -----------------------------
Equity Holder              = -----------------------------------------------------------------------------
                             -----------------------------------------------------------------------------
                             --------------------------------------
Administrator              = ----------------------------------------
PLR-107765-25                                 2

Dear ----------------:

       This is in response to your letter, dated X, requesting our ruling that income or
gain of Entity 1, equity in which is owned by Originator, not be treated as effectively
connected with the conduct of a trade or business within the United States.

                                          FACTS

       Originator is an international organization that was established by a multilateral
agreement between various governments, including the United States. The United
States became a member of Originator pursuant to an act of Congress, and by
executive order, the President of the United States designated Originator to be a public
international organization entitled to the privileges, exemptions, and immunities
conferred by the International Organizations Immunities Act, 22 U.S.C. sections 288 et
seq. Originator is not established under the laws of any one member country and is not
subject to regulatory oversight by any national regulator.

       According to Article 1 of Originator’s Articles of Agreement, Originator was
established to further economic development by encouraging the growth of productive
private enterprise in developing countries. Originator provides loans and risk capital to
private enterprises in cases where private capital is not sufficiently available from other
sources on reasonable terms. In addition, Originator seeks to mobilize domestic and
foreign private capital and to help create conditions conducive to the flow of private
capital into productive investment in its member countries. The IRS concluded in Prior
Ruling that Originator is an “international organization” as defined in Section
7701(a)(18) and, therefore, that its income is exempt from federal income tax under
section 892(b) (to the extent provided therein) and the multilateral agreement under
which it was organized. Originator, through Entity 1, has represented that none of the
facts material to Prior Ruling have changed.

        Originator funds its investment operations from various sources, including from
private investors. Historically, Originator has extended loans in two tranches, an “A”
piece and a “B” piece. The B piece may differ from the A piece in maturity, currency
denomination, and interest rate (e.g., fixed versus floating). However, the A piece and
the B piece of a loan to a single borrower are pari passu for credit purposes and are
subject to cross-default provisions. Since Date 1, Originator has been selling
participations of up to 100% in the B pieces to investors. For Period of Time 1,
Originator also has been selling participations in the A pieces to investors. Originator
has acted as loan servicer with respect to all participations in both the A pieces and B
pieces.

      In particular, in the past Period of Time 1, Originator has participated A pieces of
Number of Loans 1 to Number of Investors 1, totaling Amount of Participations 1. In the
past Period of Time 2, Originator also has participated B pieces of Number of Loans 2
to Number of Investors 2, totaling Amount of Participations 2.
PLR-107765-25                                           3

       To expand its sources of private capital, Originator will organize Entity 1, a
foreign corporation which will own participations (the “Participations”) in underlying
loans originated by Originator (the “Loans”), and which will issue securities
collateralized by the Participations to allow private investors to invest indirectly in the
Loans. The Participations will be purchased by Entity 1 using cash raised by issuing the
Notes (described below). Participations acquired by Entity 1 may also relate to Loans
originated by Originator after Entity 1 has been established.

        Entity 1 will be organized in Country A and will be classified as a foreign
corporation for U.S. federal income tax purposes. Originator has represented on behalf
of Entity 1 that, unless Originator’s U.S. office is attributed to Entity 1, Entity 1 will have
no office or other fixed place of business within the United States. Entity 1 is not entitled
to benefits under section 892.

       Entity 1 will issue multiple classes of rated notes (the “Rated Notes”) that may be
rated as investment grade or below investment grade by a recognized rating agency.
Counsel to Entity 1 will opine that each class of Rated Notes will, or should, be treated
as indebtedness for U.S. federal income tax purposes.

       Entity 1 will issue a class of subordinated interests, either in the form of
preference shares or subordinated notes (the “Subordinated Interests” and, together
with the Rated Notes, the “Notes”) that will not be rated and will represent the first loss
position in Entity 1’s assets (the Participations). In its offering document, Entity 1 will
disclose to investors that the Subordinated Interests will be treated as equity for U.S.
federal income tax purposes. Entity 1 will issue ordinary shares with nominal value,
which, under Country A corporate law, will represent the equity in Entity 1. Those
shares, which will have a par value of Par Amount, will be owned by Equity Holder, a
third party. Originator has represented on behalf of Entity 1 that each Participation is
properly treated as ownership of an interest in the underlying Loan for U.S. federal
income tax purposes rather than as an obligation of Entity 1 or some other financial
derivative. A Participation may be sold to Entity 1 by Originator after Originator has
originated the underlying Loan.

        Entity 1 will engage an investment bank, placement agent, and other institutional
advisors with relevant experience to structure and market the Notes.1 Most of the Notes
will be sold to investors. Initially, Originator expects to subscribe to and retain all of the
Rated Notes rated below investment grade as well as a substantial portion of the
Subordinated Interests. Originator may sell some or all of the retained Rated Notes in
the future but expects to retain a portion of the Subordinated Interests indefinitely.

       All cash received by Entity 1 under the terms of the Participations will be used to
pay interest and principal on the Rated Notes, and to make payments on the
Subordinated Interests, in accordance with the order of priority for payments set forth in

1 Originator will not transfer any portion of the origination fees it receives from borrowers to Entity 1.
PLR-107765-25                                  4

Entity 1’s organizational documents. Originator represents on behalf of Entity 1 that
interest income (including original issue discount) earned by Entity 1 from the
Participations, and gain recognized on any disposition of the Participations, will be
foreign-source income for U.S. federal income tax purposes.

       Originator will extend the Loans in its own name and will not hold itself out as
making the Loans on behalf of Entity 1. Originator will remain the lender of record with
respect to each Loan and is expected to retain a substantial portion (albeit likely less
than half) of each Loan for its own account. Originator has represented on behalf of
Entity 1 that Entity 1 will not engage in trading securities for its own account (or
otherwise).

       As with all the loans it extends, Originator will act as the servicer of each of the
Loans and will have the authority to collect payments, exercise creditor rights, and
dispose of any defaulted Loans to third-party buyers. The agreement governing the
Participations provides that no action taken by Originator shall constitute a partnership,
association, joint venture, or other common enterprise between Originator and Entity 1.
Originator has represented on behalf of Entity 1 that the Participations are subject to
standard market terms and documentation, and that they result in a transfer of
beneficial ownership of the Loans for U.S. federal income tax purposes. The gross fees
received by Originator for its loan-servicing activities performed for Entity 1 will amount
to less than 1% of Originator’s annual worldwide gross income.

       Other than its obligation to seek consent where contractually agreed, Originator,
as servicer and lender of record with respect to the Loans, is not obligated to consider
the interests of Entity 1 and the investors in the Notes in making any decisions in
respect of any Loan. In particular, Originator will have discretionary power to modify any
Loan in ways that Originator believes furthers its economic-development mandate, and
may make decisions in originating and administering any given Loan that are different
from those of strictly commercial lenders, and which may take into account development
considerations in addition to commercial considerations. Although Originator will have
certain contractual obligations to Entity 1, these contractual obligations will not require it
to modify loans in the best interests of Entity 1 or its investors.

                                            LAW

         Under section 882(a)(1), a foreign corporation that is engaged in a trade or
business within the United States is subject to U.S. federal income tax on its taxable
income which is effectively connected with the conduct of that U.S. trade or business
(“ECI”). With respect to a foreign corporation engaged in a U.S. trade or business,
sections 864(c)(4) and 865(e)(2), and Treas. Reg. §§ 1.864-5, -6, and -7, provide rules
for determining the extent to which the foreign corporation’s foreign-source income is
ECI.
PLR-107765-25                                          5

       Under section 864(c)(4)(A), a foreign corporation’s foreign-source income
generally is not included in ECI. Under an exception to that general rule, section
864(c)(4)(B)(ii) provides that foreign-source interest income and gain from the sale of
securities (including debt instruments) may be ECI to the extent it arises from the “active
conduct of a banking, financing, or similar business within the United States” or is
received by a foreign corporation whose principal business is trading securities for its
own account.2 Under Treas. Reg. § 1.864-4(c)(5)(i)(b), a foreign corporation is treated
as engaged in the active conduct of a banking, financing, or similar business in the
United States if it “is engaged in business in the United States” and carries on certain
enumerated financing activities in the United States, including making loans to the
public. In such case, the principles of Treas. Reg. § 1.864-4(c)(5)(ii) may apply. Treas.
Reg. § 1.864-6(b)(2)(ii)(b). In the case of foreign-source interest income and gain
derived by a foreign corporation, a material factor test applies. Treas. Reg. § 1.864-
6(b)(2)(ii)(d), referencing Treas. Reg. § 1.864-6(b)(2)(ii)(a), in turn referencing Treas.
Reg. § 1.864-5(b)(2).

       Section 864(c)(4)(B) provides that foreign-source interest income and gain of a
foreign corporation from debt it holds is ECI only if the foreign corporation has an “office
or other fixed place of business” in the United States at some time during the taxable
year in which it realizes the income to which that income or gain is attributable.

        While an agent’s independent status does not prevent a foreign principal from
being treated as engaged in a trade or business within the United States, see de
Amodio v. Comm’r, 34 T.C. 894, 906 (1960), it is relevant in determining whether
income is effectively connected with the conduct of that trade or business. Pursuant to
section 864(c)(5)(A), the office or other fixed place of business of an agent is attributed
to a foreign corporation only if both (i) the agent has the authority to conclude contracts
in the name of the foreign corporation and regularly exercises that authority and (ii) the
agent is a dependent agent rather than “a general commission agent, broker, or other
agent of independent status acting in the ordinary course of his business.” Even if the
principal and agent are related, the agent may be treated as independent of the
principal (based on the facts and circumstances) if the agent is acting in pursuance of
its usual trade or business when acting on behalf of the principal. See Treas. Reg. §
1.864-7(d)(3)(ii).

       If a foreign corporation is engaged in the active conduct of a banking, financing,
or similar business in the United States, and has a U.S. office or other fixed place of
business (including through attribution from an agent), foreign-source income or gain
from debt securities is attributable to the U.S. office (and therefore is ECI) only if (i) the
securities themselves are attributable to the U.S. office, and (ii) the securities were
acquired from making loans to the public, in the course of distributing the securities to
the public, or for the purpose of satisfying banking reserve requirements. Treas. Reg. §§
1.864-6(b)(2)(ii)(b) and 1.864-4(c)(5)(ii)(a). Under Treas. Reg. § 1.864-4(c)(5)(iii), a

2 Neither Originator nor Entity 1 will have a principal business of trading securities for its own account.
PLR-107765-25                                          6

security is attributable to a U.S. office “only if such office actively and materially
participated in soliciting, negotiating, or performing other activities required to arrange
the acquisition of the stock or security.”

                                               ANALYSIS

        As described above, Entity 1’s foreign-source income from the Participations
would be ECI only if (i) Originator’s activities in the United States in originating and
modifying the Loans would be treated as performed on behalf of Entity 1; (ii) those
activities would constitute the active conduct of a banking, financing or similar
business;3 and (iii) Originator’s U.S. office would be attributed to Entity 1. Originator’s
U.S. office would be attributed to Entity 1 only if Originator were considered an agent
that has and regularly exercises the power to conclude contracts on behalf of Entity 1,
and if Originator would not be considered an agent of independent status acting in the
ordinary course of its trade or business.

       For purpose of your requested ruling, it is necessary to determine whether Entity
1’s foreign-source income and gain from the Participations would be treated as ECI if it
were engaged in the active conduct of a banking, financing or similar business. Various
factors taken together support the conclusion in this case that it would not. These
include:

    •   Originator is a not-for-profit international organization. The pricing and terms of
        the Loans made by Originator reflect its unique mission rather than an attempt by
        Originator to make a profit. Thus, it does not have customers in the normal sense
        those terms are used in analyzing activities under section 864 and the
        regulations thereunder.

    •   Originator retains decision rights with respect to the Loans, including the right to
        agree with a borrower to modifications of a Loan even if not in the best interests
        of Entity 1 or the Note investors.

    •   Entity 1 is a separately incorporated entity that merely allows Originator to
        finance loans made by it more efficiently. The only ongoing relationship between
        Originator and Entity 1 is that Originator will perform the functions it is required to
        perform under the loan participation and servicing agreements.

    •   Entity 1 will engage Administrator to act as trustee and as collateral
        administrator. Administrator will hold the Participations on behalf of the Note

3 As noted above, if Entity 1 is not engaged in a banking, financing, or similar business, and is not

engaged in trading for its account (and Originator has represented on behalf of Entity 1 that Entity 1 will
not be so engaged), Entity 1’s foreign-source interest income cannot be ECI. Section 864(c)(4)(A).
PLR-107765-25                                 7

       investors and will receive amounts paid on the Participations and distribute
       payments to Note investors in accordance with the indenture under which the
       Notes will be issued.

   •   Originator and Entity 1 are legally independent of each other, other than
       Originator’s ownership of certain equity interests in Entity 1, which is disregarded
       in testing independence. The funding of Entity 1 is structured by independent
       financial institutions.

   •   Originator and Entity 1 are economically independent of each other. Originator
       has conducted operations for many years and is securitizing loans at this point
       through a securitization vehicle rather than directly to have a new source of
       funding. Originator is not economically dependent on its retained ownership in
       Entity 1. In turn, Entity 1’s financing is structured by an independent financial
       institution and the independent parties acquiring its securities. Upon entering into
       the Participations, Entity 1’s economic relationship will be with the borrowers
       under the Loans, not with Originator (other than in Originator’s capacity as a
       holder of certain equity interests in Entity 1).

   •   Originator retains decision rights with respect to the Loans, including the right to
       agree with a borrower to modifications of a loan even if not in the best interests of
       participants.

   •   Originator deals with borrowers as a principal for its own account.

                                         RULING

       Based solely on the information submitted and the representations made, Entity
1’s income and gain from the Participations are not treated as effectively connected with
the conduct of a trade or business within the United States.

       In accordance with section 4.01(3) of Rev. Proc. 2025-7, 2025-1 IRB 301, this
ruling does not address whether Entity 1 is engaged in a trade or business within the
United States.

                                        CAVEATS

        The ruling contained in this letter is based upon information and representations
submitted by Entity 1 and accompanied by a penalty of perjury statement executed by
an appropriate party. This office has not verified any of the material submitted in support
of the ruling request, and it is subject to verification on examination.
PLR-107765-25                                  8

       Except as expressly provided herein, no opinion is expressed or implied
concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter.

        This ruling is directed only to Entity 1. Section 6110(k)(3) of the Code provides
that this ruling may not be used or cited as precedent.

      A copy of this letter must be attached to any income tax return to which it is
relevant.

         In accordance with the power of attorney on file with this office, a copy of this
letter is being sent to your authorized representatives.


                                        Sincerely,


                                        Matthew S. Blum
                                        Senior Technical Reviewer, Branch 5
                                        Office of the Associate Chief Counsel
                                        (International)


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