Document Type



Taxation-Federal | Taxation-Transnational | Tax Law


The United States Interest Equalization tax is a one-time tax levied on certain foreign securities, proposed by President Kennedy in order to reduce the balance-of-payments deficit by restricting portfolio investment. Although the tax was enacted in 1964 as a short-term measure, it was continually extended and amended. This article explores the contours of the tax.

Prior to the tax, many foreign debt issues were attracting large amounts of capital due to their high interest rates. The IET attempts to equalize the yield of foreign debt issues with domestic debt issues by imposing a tax on the foreign issues and thus diminish the attractiveness of the foreign issues.

The IET’s success in reducing foreign investment resulted in six extensions of the tax and it is now set to expire on July 1, 1974. Current international monetary condition may necessitate yet another extension of the tax.

The IET functions by levying a tax on the acquisition by a United States person of a foreign issuer or foreign obligor based on the actual value of the security acquired. The tax rate on stock acquisitions is 11.25% of the stock’s actual value, while the rate on debt obligations is a function of the period remaining until maturity and is intended to equal the present value of the difference between European interest rates and the United States interest rate.

The term “acquisition” includes any purchase, transfer, distribution, exchange, or any other transaction by virtue of which ownership is obtained. The IET also specifies that certain transactions, even though outside the definition of acquisition, will be considered taxable under the IET.

This Article explores the rates on debt obligations, the various exemptions from the tax that exist where United States balance-of-payments is not adversely affected, as well as the elective provisions that the IET legislation contains to allow United States persons to be treated as a foreign issuer or obligor.