Venezuela Freeman Law

Quick Summary.  Venezuela imposes an income tax on the worldwide income of resident individuals, as well on foreign resident individuals to the extent of national or foreign source income attributable to a fixed base in Venezuela.  Corporations domiciled in Venezuela are subject to tax on their worldwide income.  Foreign corporations with a permanent establishment are taxed on their Venezuelan and foreign-source income attributable to the permanent establishment.  

Venezuela introduced a high-net wealth tax through a Constitutional Law initially published in July 2019.  In addition, in 2020, Venezuela introduced a new Master Tax Code by Constituent Decree.

Treaty.

 

Currency.  Venezuelan Sovereign Bolivar (VES)

Common Legal Entities.  Corporation, limited liability company, limited partnerships, and branches.

Tax Authorities.  Servicio Nacional Integrado de Administración Aduanera y Tributaria (SENIAT)

Tax Treaties.  Venezuela has 28 tax treaties in place.

 

Corporate Income Tax Rate.  15-34%

Individual Tax Rate. 6-34%

Corporate Capital Gains Tax Rate.  Various

Individual Capital Gains Tax Rate.  Subject to ordinary income rates, except gains derived from the sale of stock listed on the stock market (subject to 1% of gross).

Residence.  Presence for more than 183 days or a habitual abode.

Withholding Tax

            Dividends.  0%/34%

            Interest.  34% (company) / 0% (individual) *rates vary for nonresidents.

            Royalties.  0% (30.6% nonresidents)

Transfer Pricing.  Generally follow OECD guidelines.

CFC Rules.  No CFC rules; however, Venezuela does provide fiscal transparency rules.

Hybrid Treatment.  Contemplating OECD guilders under BEPS action 2.

Inheritance/estate tax.  Up to 55%


Set forth below are explanations, analysis, and insights with respect to the Convention and Protocol between the United States and Venezuela that was signed at Caracas on January 25, 1999 (the “Convention”).

Taxes Covered

Unlike Article 2 in the OECD Model, but consistent with the U.S. Model format, the Convention does not contain a general description of the types of taxes that are covered (i.e., income taxes), but only a listing of the specific taxes covered for both of the Contracting States. With three exceptions, the taxes specified in Article 2 are the covered taxes for all purposes of the Convention. A broader coverage, however, applies for purposes of Articles 25 (Non-Discrimination) and 27 (Exchange of Information). Article 25 applies with respect to all taxes, including those imposed by state and local governments. Article 27 applies with respect to all taxes imposed at the national level. Article 24 (Relief from Double Taxation) provides narrower coverage in that while Venezuela’s business assets tax (BAT) is a covered tax, the United States is not required by the Convention to grant a U.S. foreign tax credit for business assets taxes paid to Venezuela.

Unlike some U.S. treaties, the Accumulated Earnings Tax and the Personal Holding Companies Tax are covered taxes under the Convention because they are income taxes and they are not otherwise excluded from coverage. Under the Code, these taxes will not apply to most foreign corporations because of a statutory exclusion or the corporation’s failure to meet a statutory requirement.

General Definitions

Although they are not expressly listed in subparagraph 1(d), Venezuelan “entidades” and “colectividades”, as defined under Article 22.3 of Venezuela’s Organic Tax Code (Código Orgánico Tributario), are, for purposes of the Convention, included within the term “person.” These entities, while not legal persons under Venezuelan law, are nevertheless taxable persons under the taxation laws of Venezuela. Therefore, they are included within the definitions of “person,” as well as “national,” and “resident” (the latter subject to the Limitation on Benefits provisions of the Convention). In accordance with paragraph 2 of Article 3, the meaning of the terms “partnership,” “trust” and “estate” is determined by reference to the law of the Contracting State whose tax is being applied.

The Conventions contains the traditional saving clause found in U.S. treaties. The Contracting States reserve their rights, except as otherwise provided, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary. For example, if a resident of Venezuela performs independent personal services in the United States and the income from the services is not attributable to a fixed base in the United States, Article 14 (Independent Personal Services) would by its terms prevent the United States from taxing the income. If, however, the resident of Venezuela is also a citizen of the United States, the saving clause permits the United States to include the remuneration in the worldwide income of the citizen and subject it to tax under the normal Code rules (i.e., without regard to Code section 894(a)).

For purposes of the saving clause, “residence” is determined under Article 4 (Residence). Thus, if an individual who is not a U.S. citizen is a resident of the United States under the Code, and is also a resident of Venezuela under its law, and that individual has a permanent home available to him in Venezuela and not in the United States, he would be treated as a resident of Venezuela under Article 4 and for purposes of the saving clause. The United States would not be permitted to apply its statutory rules to that person if they are inconsistent with the treaty. Thus, an individual who is a U.S. resident under the Internal Revenue Code but who is deemed to be a resident of Venezuela under the tie-breaker rules of Article 4 (Residence) would be subject to U.S. tax only to the extent permitted by the Convention. However, the person would be treated as a U.S. resident for U.S. tax purposes other than determining the individual’s U.S. tax liability. For example, in determining under Code section 957 whether a foreign corporation is a controlled foreign corporation, shares in that corporation held by the individual would be considered to be held by a U.S. resident. As a result, other U.S. citizens or residents might be deemed to be United States shareholders of a controlled foreign corporation subject to current inclusion of Subpart F income recognized by the corporation. See Treas. Reg. section 301.7701(b)-7(a)(3).

Like the U.S. Model, subparagraph (f) provides that these terms also encompass an enterprise conducted through an entity (such as a partnership) that is treated as fiscally transparent in the Contracting State where the entity’s owner is resident.  In accordance with Article 4 (Residence), entities that are fiscally transparent in the country in which their owners are resident are not considered to be residents of a Contracting State (although income derived by such entities may be taxed as the income of a resident, if taxed in the hands of resident partners or other owners). Given the approach taken in Article 4, an enterprise conducted by such an entity arguably could not qualify as an enterprise of a Contracting State under the OECD Model because the OECD definition of enterprise requires that the enterprise be conducted by a resident, although most countries would attribute the enterprise to the owners of the entity in such circumstances. The definition contained in the Convention was intended to make clear that an enterprise conducted by such an entity will be treated as carried on by a resident of a Contracting State to the extent its partners or other owners are residents. This approach is consistent with the Code, which under section 875 attributes a trade or business conducted by a partnership to its partners and a trade or business conducted by an estate or trust to its beneficiaries.

Resident

The Convention provides that a U.S. citizen or alien lawfully admitted for permanent residence in the United States (i.e., a “green card” holder) who is not, under subparagraph 1 (b) of the Resident provisions, a resident of Venezuela, will be treated as a resident of the United States for purposes of the Convention, and, thereby entitled to treaty benefits, only if he has a permanent home or habitual abode in the United States. If, however, such an individual is a resident both of the United States and Venezuela under the rules of paragraph 1 of the Resident provisions, whether he is to be treated as a resident of the United States or of Venezuela for purposes of the Convention is determined by the tie-breaker rules of paragraph 4 of the Article, regardless of how close his nexus to the United States may be. Thus, for example, an individual resident of Mexico who is a U.S. citizen by birth, or who is a Mexican citizen and holds a U.S. green card, but who, in either case, has never lived in the United States, would not be entitled to Venezuelan benefits under the Convention. On the other hand, a U.S. citizen employed by a U.S. corporation who is transferred to Mexico for two years but who maintains a permanent home or habitual abode in the United States would be entitled to treaty benefits. However, the fact that a U.S. citizen who does not have close ties to the United States may not be treated as a U.S. resident under the Convention does not alter the application of the saving clause of paragraph 4 of Article 1 (General Scope) to that citizen. For example, a U.S. citizen who pursuant to the “citizen/green card holder” rule is not considered to be a resident of the United States still is taxable on his worldwide income under the generally applicable rules of the Code.

The Convention provides the definition of resident applicable to Venezuela and reflects Venezuela’s domestic law definitions of taxable residents.  Subparagraph (b) of the Residence provisions provides that residence for individuals is based on the concept of the “domiciliado.” An individual is considered a domiciliado, and therefore a resident of Venezuela in a given tax year for purposes of the Convention, if he is present in Venezuela for more than 180 days in that tax year or in the preceding year. Subparagraph (b) also provides that any legal person that is created or organized under the laws of Venezuela shall be considered a resident of Venezuela. This provision reflects Venezuela’s domestic law definition of corporate residence, which is analogous to the place-of- incorporation rule used in the United States. Any corporation registered under a commercial registry in Venezuela (i.e., incorporated in Venezuela) is considered a taxable resident for domestic law purposes and, under that subparagraph, for purposes of the Convention. The subparagraph also provides explicit inclusion as residents of those Venezuelan entidades and colectividades that are subject to the taxation applicable to corporations, which was considered necessary because those entities are not legal bodies incorporated in Venezuela. Those entidades and colectividades not taxed as corporations are fiscally transparent in Venezuela, and are therefore subject to the provision of paragraph 2 thereof.

Fiscally Transparent Entities

The Convention addresses special issues presented by fiscally transparent entities such as partnerships and certain estates and trusts. The provisions apply to any resident of a Contracting State who is entitled to income derived through an entity that is treated as fiscally transparent under the laws of either Contracting State. Entities falling under this description in the United States would include partnerships, common investment trusts under section 584 and grantor trusts. The provisions also apply to U.S. limited liability companies (“LLCs”) that are treated as partnerships for U.S. tax purposes.

The Convention provides that an item of income derived by such a fiscally transparent entity will be considered to be derived by a resident of a Contracting State if the resident is treated under the taxation laws of the State where he is resident as deriving the item of income. For example, if a corporation resident in Venezuela distributes a dividend to an entity that is treated as fiscally transparent for U.S. tax purposes, the dividend will be considered derived by a resident of the United States only to the extent that the taxation laws of the United States treat one or more U.S. residents (whose status as U.S. residents is determined, for this purpose, under U.S. tax laws) as deriving the dividend income for U.S. tax purposes. In the case of a partnership, the persons who are, under U.S. tax laws, treated as partners of the entity would normally be the persons whom the U.S. tax laws would treat as deriving the dividend income through the partnership. Thus, persons whom the United States treats as partners but who are not U.S. residents for U.S. tax purposes may not claim a benefit for the dividend paid to the entity under the Convention. Although these partners are treated as deriving the income for U.S. tax purposes, they are not residents of the United States for purposes of the treaty. If, however, they are treated as residents of a third country under the provisions of an income tax convention which that country has with Venezuela, they may be entitled to claim a benefit under that convention. In contrast, if an entity is organized under U.S. laws and is classified as a corporation for U.S. tax purposes, dividends paid by a corporation resident in Venezuela to the U.S. entity will be considered derived by a resident of the United States since the U.S. corporation is treated under U.S. taxation laws as a resident of the United States and as deriving the income.

These results would obtain even if the entity were viewed differently under the tax laws of Venezuela (e.g., as not fiscally transparent in the first example above where the entity is treated as a partnership for U.S. tax purposes or as fiscally transparent in the second example where the entity is viewed as not fiscally transparent for U.S. tax purposes). These results also follow regardless of where the entity is organized, i.e., in the United States, Venezuela, or in a third country. For example, income from sources in Venezuela received by an entity organized under the laws of Venezuela, which is treated for U.S. tax purposes as a corporation and is owned by a U.S. shareholder who is a U.S. resident for U.S. tax purposes, is not considered derived by the shareholder of that corporation even if, under the tax laws of Venezuela, the entity is treated as fiscally transparent. Rather, for purposes of the treaty, the income is treated as derived by an entity resident in Venezuela. These results also follow regardless of whether the entity is disregarded as a separate entity under the laws of one jurisdiction but not the other, such as a single owner entity that is viewed as a branch for U.S. tax purposes and as a corporation for tax purposes of the other Contracting State.

Savings Clause Exceptions

The Convention establishes certain exceptions to the saving clause that preserve benefits for citizens and residents of the Contracting States. The Convention lists certain provisions that are applicable to all citizens and residents of a Contracting State, despite the general saving clause rule:

(1) Paragraph 2 of Article 9 (Associated Enterprises) grants the right to a correlative adjustment with respect to income tax due on profits reallocated under Article 9.

(2) Article 24 (Relief from Double Taxation) confirms the benefit of a credit, exemption or other relief from double taxation to citizens and residents of one Contracting State for income taxes paid to the other.

(3) Article 25 (Non-Discrimination) requires one Contracting State to grant national treatment to residents and citizens of the other Contracting State in certain circumstances. Excepting this Article from the saving clause requires, for example, that the United States give such benefits to a resident or citizen of Venezuela even if that person is a citizen of the United States.

(4) Article 26 (Mutual Agreement Procedure) may confer benefits on citizens and residents of the Contracting States. For example, the statute of limitations may be waived for refunds and the competent authorities are permitted to use a definition of a term that differs from the internal law definition. As with the foreign tax credit, these benefits are intended to be granted by a Contracting State to its citizens and residents.

Business Profits (Article 7)

Article 7 provides rules for the taxation by a Contracting State of the business profits of an enterprise of the other Contracting State.

The Convention states the general rule that business profits of an enterprise of one Contracting State may not be taxed by the other Contracting State unless the enterprise carries on business in that other Contracting State through a permanent establishment (as defined in Article 5 (Permanent Establishment)) situated there. When that condition is met, the State in which the permanent establishment is situated may tax the enterprise, but only on a net basis and only on the income that is attributable to the permanent establishment. This provision is identical to paragraph 1 of Article 7 of the OECD Model.

The Convention provides rules for the attribution of business profits to a permanent establishment. The Contracting States will attribute to a permanent establishment the profits that it would have earned had it been an independent enterprise engaged in the same or similar activities under the same or similar circumstances. This language incorporates the arm’s length standard for purposes of determining the profits attributable to a permanent establishment. The computation of business profits attributable to a permanent establishment under this provision is subject to the rules of paragraph 4 and paragraph 6 of the Protocol for the allowance of allocation of expenses incurred for the purposes of earning the profits.

The “attributable to” concept is analogous–but not entirely equivalent to–the “effectively connected” concept in Code section 864(c). The profits attributable to a permanent establishment may be from sources within or without a Contracting State.

The Business Profits Article does not contain a provision corresponding to paragraph 4 of Article 7 of the OECD Model. That paragraph provides that a Contracting State in certain circumstances may determine the profits attributable to a permanent establishment on the basis of an apportionment of the total profits of the enterprise. Any such approach, however, must be designed to approximate an arm’s length result. This paragraph has not been included in the Convention because it is unnecessary. The U.S. view is that paragraphs 2 and 3 of Article 7 authorize the use of such approaches independently of paragraph 4 of Article 7 of the OECD Model because total profits methods are acceptable methods for determining the arm’s length profits of associated enterprises under Article 9 (Associated Enterprises). Accordingly, it is understood that, under paragraph 2 of the Convention, it is permissible to use methods other than separate accounting to determine the arm’s length profits of a permanent establishment where it is necessary to do so for practical reasons, such as when the affairs of the permanent establishment are so closely bound up with those of the head office that it would be impossible to disentangle them on any strict basis of accounts.

The Business Profits Article provides that nothing in the Article affects the application of any law of a Contracting State relating to the determination of the tax liability of any person in cases where the information available to the competent authority of that State is inadequate to determine the profits to be attributed to a permanent establishment. Notably, the Internal Revenue Service would have this power even in the absence of such a specific provision. Regardless, however, determination of the profits of a permanent establishment must be consistent with the principles stated in the Convention (i.e., it must seek to reflect arm’s length pricing and appropriate deductions of expenses.

The Convention provides that in determining the business profits of a permanent establishment, deductions are allowed for the expenses incurred for the purposes of the permanent establishment, ensuring that business profits will be taxed on a net basis. This rule is not limited to expenses incurred exclusively for the purposes of the permanent establishment, but includes a reasonable allocation of expenses incurred for the purposes of the enterprise as a whole, or that part of the enterprise that includes the permanent establishment. Deductions are allowed regardless of which accounting unit of the enterprise books the expenses, so long as they are incurred for the purposes of the permanent establishment. For example, a portion of the interest expense recorded on the books of the home office in one State may be deducted by a permanent establishment in the other if properly allocable thereto.

The Convention clarifies, as does the UN Model and the commentary to the OECD Model, that a permanent establishment may not take any deduction for royalties, fees, commissions, or service fees paid to its home office or other office of the enterprise other than amounts which represent reimbursement of actual expenses incurred by such office. Since the permanent establishment and the home and other offices of the enterprise are parts of a single entity, there should be no profit element in such intra-company transfers. Similarly, a permanent establishment may not increase its business profits by the amount of any notional fees for ancillary services performed for another unit of the enterprise, but also should not receive a deduction for the expense of providing such services, since those expenses would be incurred for purposes of a business unit other than the permanent establishment.

The Convention allows each Contracting State, consistent with its law, to impose limitations on the deductions taken by the permanent establishment as long as the limitations are consistent with the concept of net income. This provision would not, for example, permit the Contracting States to deny a deduction for wages or interest expenses since such expenses are so fundamental that denial of deductions would be inconsistent with the concept of net income.

The Convention provides that the expenses that may be considered to be incurred for the purposes of the permanent establishment are expenses for research and development, interest and other similar expenses, as well as a reasonable amount of executive and general administrative expenses. These deductions are allowed, regardless of where they are incurred, but only to the extent that they have not been deducted by the enterprise, and have not been reflected in other deductions allowed to the permanent establishment, such as deductions for the cost of goods sold or of the purchases. The allocation of expenses must be accomplished in a manner that reflects to a reasonably close extent the factual relationship between the deduction and the permanent establishment and the enterprise. Some examples of bases and factors that can be used in allocating expenses according to this factual relationship are set out in paragraph 6 of the Protocol, and are taken from the bases and factors described in Temporary Treas. Reg. § 1.861-8T(c)(1). Accordingly, this rule permits (but does not require) each Contracting State to apply the type of expense allocation rules provided by U.S. law (such as in Treas. Reg. §§ 1.861-8 and 1.882-5).

The Convention provides that no business profits can be attributed to a permanent establishment merely because it purchases goods or merchandise for the enterprise of which it is a part. This rule applies only to an office that performs functions for the enterprise in addition to purchasing. The income attribution issue does not arise if the sole activity of the permanent establishment is the purchase of goods or merchandise because such activity does not give rise to a permanent establishment under Article 5 (Permanent Establishment). A common situation in which this provision is relevant is one in which a permanent establishment purchases raw materials for the enterprise’s manufacturing operation conducted outside the United States and sells the manufactured product. While business profits may be attributable to the permanent establishment with respect to its sales activities, no profits are attributable to it with respect to its purchasing activities.

The Convention provides that the business profits attributed to a permanent establishment include only those profits derived from that permanent establishment’s assets or activities. This rule is consistent with the “asset-use” and “business activities” test of Code section 864(c)(2). The OECD Model does not expressly provide such a limitation, although it generally is understood to be implicit in paragraph 1 of Article 7 of the OECD Model. This provision was included in the Convention to make it clear that the limited force of attraction rule of Code section 864(c)(3) is not incorporated.

This provision also tracks paragraph 6 of Article 7 of the OECD Model, providing that profits shall be determined by the same method each year, unless there is good reason to change the method used. This rule assures consistent tax treatment over time for permanent establishments. It limits the ability of both the Contracting State and the enterprise to change accounting methods to be applied to the permanent establishment. It does not, however, restrict a Contracting State from imposing additional requirements, such as the rules under Code section 481, to prevent amounts from being duplicated or omitted following a change in method.

The Convention coordinates the provisions of Article 7 and other provisions of the Convention. When business profits include items of income that are dealt with separately under other articles of the Convention, the provisions of those articles will, except when they specifically provide to the contrary, take precedence over the provisions of Article 7. For example, the taxation of dividends will be determined by the rules of Article 10 (Dividends), and not by Article 7, except where, as provided in paragraph 6 of Article 10, the dividend is attributable to a permanent establishment or fixed base. In the latter case the provisions of Articles 7 or 14 (Independent Personal Services) apply. Thus, an enterprise of one State deriving dividends from the other State may not rely on Article 7 to exempt those dividends from tax at source if they are not attributable to a permanent establishment of the enterprise in the other State. By the same token, if the dividends are attributable to a permanent establishment in the other State, the dividends may be taxed on a net income basis at the source State’s full corporate tax rate, rather than on a gross basis under Article 10 (Dividends).

The Article incorporates into the Convention the rule of Code section 864(c)(6). Like the Code section on which it is based, this provision provides that any income or gain attributable to a permanent establishment or a fixed base during its existence is taxable in the Contracting State where the permanent establishment or fixed base is situated, even if the payment of that income or gain is deferred until after the permanent establishment or fixed base ceases to exist. This rule applies with respect to paragraphs 1 and 2 of Article 7 (Business Profits), paragraph 6 of Article 10 (Dividends), paragraph 6 of Article 11 (Interest), paragraph 4 of Article 12 (Royalties), paragraph 3 of Article 13 (Gains), Article 14 (Independent Personal Services) and paragraph 2 of Article 22 (Other Income).

The effect of this rule can be illustrated by the following example. Assume a company that is a resident of Venezuela and that maintains a permanent establishment in the United States winds up the permanent establishment’s business and sells the permanent establishment’s inventory and assets to a U.S. buyer at the end of year 1 in exchange for an interest-bearing installment obligation payable in full at the end of year 3. Despite the fact that Article 13’s threshold requirement for U.S. taxation is not met in year 3 because the company has no permanent establishment in the United States, the United States may tax the deferred income payment recognized by the company in year 3.

The Business Profits Article is subject to the saving clause of paragraph 4 of Article 1 (General Scope). Thus, if a citizen of the United States who is a resident of Venezuela under the treaty derives business profits from the United States that are not attributable to a permanent establishment in the United States, the United States may tax those profits, notwithstanding the provision of paragraph 1 of this Article which would exempt the income from U.S. tax.

The benefits of the Business Profits Article are also subject to Article 17 (Limitation on Benefits). Thus, an enterprise of the other Contracting State that derives income effectively connected with a U.S. trade or business may not claim the benefits of Article 7 unless the resident carrying on the enterprise qualifies for such benefits under Article 17.

Branch Tax (Article 11A)

Article 11A permits the United States to impose its branch taxes on the “dividend equivalent amount” and the “excess interest” of a Venezuelan company that derives business profits attributable to a U.S. permanent establishment or which derives income subject to tax on a net basis in the United States under Articles 6 (Income from Immovable Property (Real Property) or 13 (Gains). These branch taxes are imposed under Code section 884.  The tax on the dividend equivalent amount is limited to 5 percent, the same rate that applies to direct investment dividends. The tax on excess interest is limited to 10 percent, except in the case of persons referred to in subparagraph (a) of paragraph 11 (Interest).

More specifically, with respect to profit, Article 11A permits the United States generally to impose its branch profits tax on a corporation resident Venezuela to the extent of the corporation’s

(i) business profits that are attributable to a permanent establishment in the United States

(ii) income that is subject to taxation on a net basis because the corporation has elected under section 882(d) of the Code to treat income from real property not otherwise taxed on a net basis as effectively connected income and

(iii) gain from the disposition of a United States real property interest, other than an interest in a United States real property holding corporation.

The United States may not impose its branch profits tax on the business profits of a corporation resident in Venezuela that are effectively connected with a U.S. trade or business but that are not attributable to a permanent establishment and are not otherwise subject to U.S. taxation under Article 6 or paragraph 1 of Article 13.

Paragraph 10(a) of the Protocol specifies that the term “dividend equivalent amount” used in subparagraph (a) shall have the meaning it has under section 884 of the Code, as amended from time to time, provided the amendments are consistent with the purpose of the branch profits tax. Generally, the dividend equivalent amount for a particular year is the income described above that is included in the corporation’s effectively connected earnings and profits for that year, after payment of the corporate tax under Articles 6, 7 or 13, reduced for any increase in the branch’s U.S. net equity during the year or increased for any reduction in its U.S. net equity during the year. U.S. net equity is U.S. assets less U.S. liabilities. See Treas. Reg. section 1.884- 1. The dividend equivalent amount for any year approximates the dividend that a U.S. branch office would have paid during the year if the branch had been operated as a separate U.S. subsidiary company.

With respect to interest, Article 11A permits the United States generally to impose its branch profits tax on a corporation resident Venezuela to the extent of the corporation’s “excess interest,” which is defined in paragraph 10(b) of the Protocol. In general, excess interest is the portion of the entire enterprise’s interest expense that is allocated to the branch over the amount of interest paid by the U.S. branch, and a tax is applied to the amount of that deemed payment. Such excess interest is deemed to arise in Contracting State in which that branch is located. The rate of tax on the deemed payment is limited to 10 percent, the rate generally applicable to interest payments to residents of the other Contracting State. However, in the case of interest deemed paid by the branch of a financial institution, the rate of tax is limited to 4.95 percent, the rate generally applicable to interest beneficially owned by financial institutions. The formula for calculating excess interest does not require that interest be fully deductible in one year. Rather, interest may be “excess interest” even though not deductible in a particular year if it is allocable to the U.S. income under U.S. domestic law rules.