On June 10, 2021, the IRS’s Large Business and International Division (“LB&I”) announced a broad compliance campaign targeting “financial service entities engaged in a U.S. trade or business.” Through issue-based audits, the LB&I campaign will examine “whether foreign investors were subject to U.S. tax on effectively connected income from lending transactions engaged in through a U.S. trade or business.” The campaign’s description explains that there is a safe harbor rule under Section 864(b)(2) of the Internal Revenue Code (the “Code”) for foreign investors who only trade stocks and securities for their own accounts and are not engaged in a U.S. trade or business. That safe harbor is unavailable for dealers in stocks or securities, including entities engaged in a lending business, or to foreign investors in partnerships engaged in these activities.

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