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In the US, the IRS Large Business & International (LB&I) division has begun implementing a broad compliance campaign targeting certain foreign investors engaged in offshore lending to US-based borrowers. The LB&I campaign, announced last year, will utilize issue-based audits to examine whether foreign investors were subject to US tax on effectively connected income (ECI) from lending transactions engaged in through a US trade or business. 

The IRS has stated that it believes that certain foreign investors are not properly reporting or paying US tax on these transactions. While the scope and scale of this campaign remain uncertain, the IRS recently began conducting issue-based examinations in this area. 

Action items: Offshore lenders should consider potential increased audit exposure resulting from the IRS campaign when structuring new loan transactions with US borrowers. With respect to past transactions, they should review past loan acquisition policies and structures to analyze whether any remedial actions can or should be taken.