New IRS proposed regulations under Section 956 substantially reduce "deemed dividend" concerns with respect to pledges and guarantees by CFCs

Until the issuance of the Proposed Regulations described below, under Section 956 of the Internal Revenue Code of 1986 (IRC) and Treasury Regulations thereunder, deemed dividends were potentially created when a U.S. borrower pledged as security two-thirds or more of the voting stock in a foreign subsidiary considered to be a "controlled foreign corporation" (CFC) for U.S. tax purposes, or if the CFC guaranteed or pledged its assets as security for the U.S. parent's debt.

As a result, credit agreements for U.S. borrowers have typically been drafted to exclude CFCs as guarantors, to exclude the pledge of any assets of a CFC, and to limit any pledge of voting stock of a CFC to no more than 65 percent of the voting stock. These provisions often treated domestic subsidiaries with no assets other than stock in one or more CFCs to be the equivalent of CFCs.

The origin of the Section 956 deemed dividend rules was the fact that a U.S. parent was generally able to defer paying U.S. taxes on earnings of a CFC (with certain exceptions) until the earnings were actually distributed to the U.S. parent. The purpose of the Section 956 deemed dividend rules was to prevent a U.S. parent from benefiting from the earnings of a CFC, e.g., by causing the CFC to guarantee or pledge its assets in support of a borrowing by the U.S. parent, without paying the U.S. taxes that would result from an actual distribution of the earnings to the U.S. parent. The Section 956 rules addressed this issue by potentially triggering a "deemed dividend" to the U.S. parent for U.S. tax purposes in the event of such a pledge or guaranty.

Read More: New IRS proposed regulations under Section 956 substantially reduce "deemed dividend" concerns with respect to pledges and guarantees by CFCs


Download PDF Share Back To Listing
Loading data