Re: Regulatory Arbitrage

[Duncan Frissell <frissell@panix.com>]

On Fri, 10 Jun 1994, Eric Hughes wrote:

> One of the reasons eurodollars got created was that at that time a
> London bank could offer higher interest rates on dollars than an
> American bank could.  They offered better service than the
> competition.  They could do so, in part, because neither the USA nor
> UK governments put reserve requirements on dollar deposits held in
> England banks.

Another reason was the tax consequences.  If you were a US bank with 
money to lend and you lent it from the US, you owed taxes on the 
earnings.  If you formed a Netherlands Antilles subsidiary and lent money 
the earnings on those loans could be accumulated tax free "forever."  If 
the parent bank in the US could use some of this dough, no need to 
repatriate it, just lend it to the parent -- then the tax-deductible 
interest payments flow from the high-tax parent to the zero-tax 
subsidiary getting more money forever out of the hands of the tax man.

The next time you go to the cinema, read *all* the credits.  Chances are 
you will see a line towards the end like:  "Financing provided by 
SomeBank, NV" indicating a Netherlands Antilles corporation.

The NA became popular because they were covered by the US-Netherlands Tax 
Treaty and thus no tax withholding applied to payments made to the NA.

DCF