Controlled Foreign Corporation


On October 31, 2018, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (the “IRS”) proposed new regulations (the “Proposed Regulations”)[1] that are likely to allow many controlled foreign corporations (“CFCs”)[2] of U.S. multi-national borrowers to guarantee the debt of their parents and to allow the U.S. parent to pledge more than 66 2/3% of the voting stock of the CFC (and to have the CFC provide negative covenants), all without causing the U.S parent to recognize deemed dividend income under Section 956 of the Code.[3] Specifically, the Proposed Regulations will exempt a corporate “United States shareholder”[4] of a CFC from including its pro rata share of a CFC’s earnings attributable to an “investment in United States property” (a “Section 956 deemed dividend”) as income to the extent that such deemed dividend would be excluded from income if it was paid as an actual dividend under Section 245A.  However, there will remain certain situations where Section 956 will still trigger deemed dividends.[5]  Although the Proposed Regulations are proposed only (and may be amended before being finalized), corporate U.S. borrowers may rely on them so long as the borrower and all parties related to the borrower apply them consistently with respect to all CFCs of which they are United States shareholders.[6]