As a general rule, interest paid by individuals, partnerships, and trusts takes its source from their place of residence. A natural corollary to this rule is that interest paid by individuals, partnerships, and trusts that are “residents” of the United States has U.S. source.

This source rule has consequences that both borrowers and lenders will occasionally find startling. An example will help illustrate this point. Hans is a German citizen. He meets John, a U.S. citizen, at St. Andrew’s Golf Course for the British Open. John is the owner of Tyco, a U.S. toy-manufacturing corporation. Hans loans John $ 100,000. One year later, the two meet up for another rendez-vous at the British Open. At that time, John repays the loan, complete with interest. Read More