In Private Letter Ruling 202536015 (issued June 9, 2025; released Sept. 5, 2025), the IRS addressed the U.S. federal income tax treatment of a financing structure involving a multilateral development institution (the Originator) and a wholly owned foreign special-purpose vehicle (Entity 1).
Various governments, including the United States, established the Originator through a multilateral treaty. The executive branch formally recognized it as a public international organization entitled to privileges under the International Organizations Immunities Act. Importantly, the IRS had previously determined that the Originator qualified as an “international organization” under Section 7701(a)(18), and that its income was therefore exempt from federal income tax under Section 892(b). This section of the Internal Revenue Code provides that the income of international organizations received from investments in U.S. stocks, bonds, or other domestic securities, or from U.S. bank deposits or other U.S.-source investment income, is generally exempt from taxation. Section 7701(a)(18) defines “international organization” to mean a public international organization entitled to privileges, exemptions, and immunities under the International Organizations Immunities Act. Thus, similar to Section 892(a), which generally provides an exemption to foreign governments and their instrumentalities, Section 892(b) specifically extends these exemptions to qualifying international organizations. This exemption, however, did not extend to Entity 1.
The Originator was created to facilitate economic development by lending to private enterprises in cases where private capital was not readily available. To mobilize additional private capital, the Originator historically extended loans in two tranches (an “A piece” and a “B piece”), retaining one portion while selling participations in the other. All of the loans were extended to non-U.S. borrowers. As part of its strategy to expand investor participation, the Originator caused Entity 1 to be organized in a foreign jurisdiction, which would then purchase loan participations from the Originator and issue rated notes and subordinated instruments collateralized by those participations.
Although Entity 1 was a separate corporation for U.S. tax purposes, it had no U.S. office of its own and no entitlement to Section 892 benefits. The Originator continued to act as lender of record and servicer with respect to the underlying loans. It retained significant discretion to modify loans, including in ways that might not align with Entity 1’s or noteholders’ best commercial interests, given the Originator’s development-driven mission. For U.S. tax purposes, the participations transferred to Entity 1 were treated as ownership interests in the underlying loans. The Originator earned only modest servicing fees (less than 1% of its global gross income) and did not hold itself out as making loans for Entity 1.
IRS Findings: Why Entity 1’s Interest Income Was Not ECI
The loans to the foreign borrowers produced foreign source interest income and foreign source capital gains. The IRS examined whether Entity 1’s foreign-source interest income and gains from these loan participations could be treated as effectively connected income (ECI) with a U.S. trade or business under Section 864(c).
The IRS concluded that Entity 1’s income was not ECI. The analysis turned on three main findings:
- No U.S. office attribution. The Originator’s U.S. office was not attributed to Entity 1 because the Originator was not acting as Entity 1’s “dependent” agent. It remained the lender of record and exercised its own discretion in loan administration for its own behalf, not on behalf of Entity 1, regardless of whether Entity 1 was a wholly owned entity.
- No customer-facing business. The IRS emphasized that the Originator was not a profit-driven financial intermediary with “customers” in the traditional sense, but rather a multilateral development institution furthering public policy objectives. Entity 1 itself had no customer relationships with borrowers.
- Foreign-source income not effectively connected. Under the Code and regulations, foreign-source interest generally is not ECI unless it is derived from the active conduct of a banking, financing, or similar business in the United States and is attributable to a U.S. office of the foreign person. The IRS concluded that because Entity 1’s loan participations were foreign-source and its activities did not rise to the level of an active U.S. banking or financing business, the material-factor and attribution tests of Treas. Reg. §§1.864-4, -5, -6, and -7 were not met.
Accordingly, the IRS ruled that Entity 1’s foreign-source income from participations in the loans would not be treated as effectively connected with a U.S. trade or business, even though the loans themselves were originated and serviced, in part, through the Originator’s U.S. presence.
Tax Implications of the PLR for Cross-Border Debt Investments and ECI Risk
This private letter ruling (PLR) may provide reassurance to cross-border investors in debt that ECI risk may be managed in cases where loan participations are acquired in a secondary-market posture and where servicing remains with an independent party. It signifies that attribution of a U.S. office is not automatic, even when an affiliate performs significant functions in the United States. Instead, the IRS focused on whether the servicer was acting as a dependent agent of the foreign investor.
For taxpayers, the ruling may be particularly valuable because it validates the approach of separating origination and borrower-facing functions from the offshore investment vehicle. It also reflects a broader IRS willingness to analyze whether the facts indicate a customer relationship or direct engagement in lending, as opposed to mere investment in loan participations.
However, this outcome rested in part on the Originator’s special status as a Section 892-exempt international organization with a development objective. Commercial lenders and private credit funds generally do not share these attributes, and the IRS may scrutinize their structures more closely.
Practical Consideration for Taxpayers
- Maintain separation from origination. Offshore vehicles generally may not act as lenders of record or negotiate directly with borrowers. Acquiring interests through participations or assignments post-origination may remain a structural defense against ECI.
- Use independent servicers. In many structures, loan administration and borrower interaction are carried out by a servicer or agent operating under its own mandate, rather than directly on behalf of the offshore investor. Market practice often emphasizes the importance of clarifying this independence, for example through express disclaimers of agency and provisions that confirm the servicer’s separate role.
- Document independence. In contracts, taxpayers may wish to make clear that the servicer does not bind the offshore entity and exercises discretion in loan modifications for its own account.
- Avoid U.S. origination activity. Engaging a U.S. affiliate to originate loans for a foreign vehicle may result in ECI, as prior IRS guidance has warned. Structures that resemble co-origination or “table funding” may remain risky.
- Understand limits of PLR reliance. The ruling binds only the requesting taxpayer and may not be cited as precedent. It nevertheless may be instructive as an indicator of the IRS’s analytical approach to ECI in the debt investment context.
Key Takeaways from PLR 202536015 for International Debt Investment Structures
PLR 202536015 may be seen as a favorable development for international investors in U.S. debt markets. It confirms that where origination and servicing functions are properly structured and clearly independent, foreign investors may hold loan participations without triggering effectively connected income. At the same time, taxpayers should be mindful that the IRS’s comfort here was influenced by the unique features of the Originator, including its Section 892 exemption and public mission. Private-sector participants should consider adopting conservative structuring practices to mitigate ECI risk.