A US corporation ("MPI"), owned by a Bahamian company ("ECL"), issued a loan note to ECL for a total principal sum of $2,250,000 carrying interest at 4% pa. ECL assigned the loan note to a Honduras company ("Industrias") which was also owned by ECL, in consideration of the issue by Industrias to ECL of loan notes with the same principal amount and carrying interest at 4% p.a. At issue was Art. IX of the US-Honduras Income Tax Convention which provided that interest on notes "from sources within one of the contracting States received by a resident, corporation or other entity of the other contracting State ... shall be exempt from tax by such former State".
The Court stated (at p. 933):
"As utilized in the context of article IX, we interpret the terms 'received by' to mean interest received by a corporation of either of the contracting States as its own and not with the obligation to transmit it to another. The words 'received by' refer not merely to the obtaining of physical possession on a temporary basis of funds representing interest payments from a corporation of a contracting State, but contemplate complete dominion and control over the funds."
It then stated (at p 934) that Industrias "was committed to pay out exactly what it collected, and it made no profit on the acquisition of MPI's note in exchange for its own". The Court then further stated:
"In effect, Industrias, while a valid Honduran corporation, was a collection agent with respect to the interest it received from MPI. Industrias was merely a conduit for the passage of interest payments from MPI to ECL, and it cannot be said to have received the interest as its own. Industrias had no actual beneficial interest in the interest payments it received, and in substance, MPI was paying the interest to ECL which 'received' the interest within the meaning of article IX. Consequently, the interest in question must be viewed as having been 'received by' an entity (ECL) which was not a 'corporation or other entity' of one of the contracting States involved herein, and we therefore hold that the interest in question was not exempt from taxation by the United States under article IX of the convention."