On October 27, 2009, the Foreign Account Tax Compliance Act of 2009 (the “Bill”) was introduced by Senate Finance Committee Chairman Max Baucus, Senator John Kerry and Congressmen Charlie Rangel and Richard Neal. The Bill is comprised of numerous proposals designed to combat US tax evasion. The focus of this note is on the proposed repeal of the “TEFRA D” bearer bond exemption given its potential impact on the Eurobond market.


Generally, the bearer bond provisions of the Tax Equity and Fiscal Responsibility Act (“TEFRA”), introduced in 1982, are designed to prevent certain US persons from acquiring publicly issued bearer debt securities having a maturity of more than one year. However, under the TEFRA regime US and non-US issuers can issue such bearer debt securities, including in global or dematerialized bearer form through Euroclear and/or Clearstream Luxembourg, in compliance with the “TEFRA C” or “TEFRA D” safe harbor requirements designed to prevent the offer or sale of such securities to non-qualifying US persons.


Currently, the TEFRA D exemption is frequently used in the context of Eurobond issuance in global bearer form, and can be relied upon by an issuer that ensures that “reasonable arrangements” are in place to prevent bearer debt securities from being sold to non-qualifying US persons in connection with the offering. The TEFRA D exemption is significant because (1) issuer compliance provides a safe-harbor from the potential application of a significant US excise tax[1] and (2) it allows US issuers to offer debt securities in bearer form to non-US investors free of US withholding tax (the “portfolio interest exemption”)[2] without the burdensome requirement of having to obtain beneficial ownership certifications (IRS Form W-8 withholding certificates) from each investor.


Section 102 of the proposed Bill, however, would repeal TEFRA D and TEFRA C. In effect, both US and non-US issuers of publicly issued debt securities having a maturity of more than one year would be subject to certain sanctions if the debt security is not in registered form. These sanctions include:


for a US issuer, the application of a US withholding tax on interest payment (disqualification of portfolio interest exemption)[3], a denial of a US tax deduction on interest paid and the imposition of a US excise tax.

for a non-US issuer, including those who have issued bearer debt securities solely to non-US persons, the imposition of the US excise tax.

In addition, a non-US investor does not currently need to provide beneficial ownership certifications to a US issuer in order to receive interest payments on the bearer debt securities free of US withholding tax; the Bill would effectively impose this requirement on non-US investors. Thus, the Bill would inhibit US issuers from accessing the international debt markets where non-US investors are unwilling (or unable under local law) to provide the beneficial ownership certifications required for registered debt securities.


Although not free from doubt, dematerialized debt securities (and potentially permanent global notes) held in bearer form through a clearing organization may be considered to be in registered form, and thus not subject to the sanctions mentioned above, if the investor (1) will under no circumstances obtain a physical security or (2) can obtain a physical bearer security only in the extraordinary event that the clearing organization that maintains the book-entry system goes out of business without a successor. Accordingly, non-US issuers that issue debt securities through Euroclear and/or Clearstream Luxembourg may be able to comply with the Bill by providing that physical bearer securities will not be issued unless the clearing organization ceases to exist and there is no successor. With respect to US issuers, such debt offerings also may be treated as in registered form, but the US issuers will generally need to obtain the beneficial ownership certifications from the investors to avoid US withholding tax.


While the Bill appears to be clear in imposing limitations on US issuers, it is not entirely clear that Congress intended to impose the significant US excise tax on non-US issuers that have no connection with the United States. It is also unclear whether the Internal Revenue Service has the jurisdictional means to enforce the US excise tax. Nevertheless, registration-required debt securities that are issued in bearer form will be subject to the US excise tax under the current version of the Bill.


If enacted, the TEFRA provisions of the Bill will apply to debt securities issued 180 days after the Bill’s enactment.


The Bill is currently under review with the Senate Committee on Finance.


For further information, please see the following:


Text of US bill:




Technical explanation of bill: http://jct.gov/publications.html?func=startdown&id=3596


This update is a summary for general information only. It is not a full analysis of the matters presented and should not be relied upon as legal advice.



[1] The US. excise tax equals 1% of the principal amount of the debt multiplied by the number of years (or portions thereof) to maturity.

[2] Portfolio interest is any US source interest other than interest received from certain related parties or interest earned by a bank on an extension of credit in the ordinary course of its lending business. Currently, debt instruments in bearer form will not qualify for the portfolio interest exemption unless the instruments are issued in full compliance with TEFRA requirements.

[3] Although US withholding tax is technically imposed on the non-US investor, as a practical matter this is properly viewed as an issuer sanction whenever the issuer bears the cost of grossing up or indemnifying the investor for the tax.

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