2.4. Tax consequences of conversion
In general, if a lender accepts the stock of the debtor in satisfaction of the liability owed to the lender, the debtor is treated as having paid the liability in an amount equal to the fair market value of the stock issued to the lender. If the issue price of the debt instrument is greater than the amount treated as having been paid, the excess will be treated as cancelation of indebtedness income.
From the debtor’s perspective, in general, gross income includes all income from discharge of indebtedness. Thus, absent an exclusion, a debtor will include cancellation of indebtedness income in the calculation of the debtor’s gross income. If a debtor is in bankruptcy, the amount of the cancellation is excluded from income.If a debtor is insolvent, but not in bankruptcy, the debtor may exclude the amount of cancellation from income to the extent the debtor is not made solvent by the cancellation.
2.5. Withholding taxes
Although the United States normally imposes a 30% withholding tax on the US-source interest income of non-US persons, the United States does not tax portfolio interest received by a non-resident individuals and corporations.
“Portfolio interest” means any interest (including original issue discount) which, but for the portfolio interest exception, would be subject to withholding tax under the Code and (in the case of obligations issued on or before 18 March 2012) which is either:
(1) paid in respect of an instrument in bearer form,69
(2) sold under procedures reasonably designed to prevent sale or resale to US persons,
(3) payable only outside the United States or its possessions and
(4)payable in respect of an obligation (subject to some exceptions) that states on its face that any US person who holds the obligation will be subject to limitations under US tax laws; or
(1) paid in respect of an obligation in registered form and (2) in respect of which the issuer has received a Form W-8BEN or other required statement
as to qualification.
Registered form means, in general, that the right to principal and interest may be transferred only through surrendering the old instrument (with the reissuance of the instrument to the new holder), through a book-entry system maintained by the issuer or its agent, or through both of these methods. An obligation is considered transferable through a book-entry system if the ownership of an interest in the obligation is required to be reflected in a book entry, whether or not physical securities are issued. A book entry is a record of ownership that identifies the owner of an interest in the obligation. For obligations issued after 18 March 2012, registered form would include instruments that may be transferred by means of a dematerialized book-entry system or other book-entry system specified by the US Treasury.
Portfolio interest does not include any interest if the amount of such interest is determined by reference to any receipts, sales or other cash flow of the debtor or a related person, any income or profits of the debtor or a related person, any change in value of any property of the debtor or a related person, or any dividend, partnership distributions, or similar payments made by the debtor or a related person. The exclusion in the preceding sentence does not apply, however, to amounts that are contingent
solely because (1) the timing of any interest or principal is subject to a contingency, (2) the interest is paid in respect of non-recourse or limited recourse debt, (3) the debtor or a related party entered into a hedging transaction to manage the interest rate or currency risk or (4) the interest is determined by reference to the value, yield or index of certain publicly traded property.
Although not entirely clear, there is a risk that making the interest payments contingent upon the reserves of the issuer would be viewed as a contingency based upon the receipts or cash flow of the issuer, making the payments of interest ineligible for the portfolio interest exception. Depending upon the location of the tax residence of the investor, this could result in the full 30% withholding rate being imposed. Under some treaties, such a characterization would result in the dividend withholding rate being