Raising debt from foreign investors can be a powerful tool for building a robust lending platform, however it’s essential to understand the best practices for engaging with foreign investors.
This article outlines the 3 key steps you must follow when raising debt from foreign investors.
Step 1: Ensure the foreign investor is not on the OFAC sanctions list
In today’s increasingly complex global environment, U.S. sanctions have become powerful instruments of foreign policy and economic enforcement. The U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) enforces strict prohibitions and administers sanctions on engaging in transactions with, or providing services to, designated foreign countries, territories, entities, and individuals identified as threats to national security or foreign policy.
When raising debt from foreign investors, it is important to ensure that the investor; any person controlling or controlled by the investor; any person having a beneficial interest in the investor if investor is an entity or any person for whom the investor is acting as agent or nominee in connection with this investment; does not appear on OFAC sanctions list.
The OFAC Sanctions List Search tool offers access to lists of countries, territories, individuals, and entities subject to U.S. sanctions.
Step 2: Complete thorough AML and Know Your Investor reviews
To comply with the U.S. Treasury’s Financial Crimes Enforcement Network Anti-Money Laundering (AML) requirements, it is important to “know your investor.”
If the investor is an individual, this includes verifying identity through standard documentation such as a passport, banking details, and employment information. If the investor is an entity, you must identify its beneficial owners and control persons and find out the individuals who have control over the entity. This can be done by reviewing entity documents such as the articles of incorporation, charter documents, operating or partnership agreements.
After verifying the investor’s identity, it is essential to confirm that the funds used to purchase the notes are wired from an account in the investor’s name, not from a third party. Whenever possible, using a U.S. bank account to receive purchaser funds is recommended, as U.S. banks maintain their own compliance programs to meet AML requirements.
Step 3: Review tax requirements that allow use of the portfolio interest exemption
The portfolio interest exemption allows foreign investors to receive interest payments from borrowers in debt instruments without incurring the standard withholding tax on such interest payments (approximately 30-37%). This preferential tax treatment increases the attractiveness of U.S. debt instruments to foreign investors and encourages greater cross-border capital investment. However, to take advantage of this exemption, it is important to understand the requirements to qualify for it. Below is a list of requirements:
- Borrower must be a US Person.
- Investor must provide the necessary documentation to establish their status as a foreign national: IRS Form W-8BEN for foreign individual and IRS Form W-8BEN-E for foreign entities.
- Invetor cannot be a bank.
- Investor cannot own 10% or more of the borrower’s voting stock if borrower is a corporation or 10% or more of the borrower’s capital or profits if borrower is a partnership (if either is applicable).
- Investor cannot be related to the borrower if the investor is a Controlled Foreign Corporation.
- Portfolio Interest must not be contingent on cashflow, income or profits of the borrower, change in value of any property of the borrower, or any dividend, distributions or similar payments made by the borrower.
- Portfolio Interest cannot be income “effectively connected” to a U.S. trade or business
- The underlying loan must be in “registered form.”
- The foreign country of the investor cannot have inadequate information exchange with the U.S.
Raising debt from foreign investors can unlock significant advantages such as expanding your investor base and building a robust lending platform. However, these opportunities come with compliance considerations that demand strategic planning and a well-informed approach. For those seeking deeper strategic guidance, we encourage you to listen to our webinar, Offshore Capital Concerns – A Tactical Guide.
How Fortra Law Can Help
As you refine your approach to offshore capital, Fortra Law can help you build a reliable structure that supports long term success. Our Corporate and Securities team advises on compliance, investor onboarding, documentation, and ongoing governance so that your international capital strategy aligns with both regulatory expectations and your business goals.
Reach out to our team to create a framework that protects your platform and strengthens your investor relationships.
