Subpart F

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Introduction

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]

This post outlines at a high-level certain provisions under the recently enacted 2017 tax legislation (Pub. L. 115-97, the “Tax Act”) that may affect M&A Transactions.  Some of these rules are very complex, particularly in cross-border transactions, and this post describes them in general terms without all of their fine details.  The discussion of foreign corporations below is in the context of foreign subsidiaries of U.S. groups.

Multiple Lower Effective Corporate Tax Rates

There are now multiple effective corporate tax rates and the much-despised corporate alternative minimum tax has been repealed.  Because all of them are substantially below 35 percent, they may contribute to an increase in asset prices.  In addition, tax benefits now may be less valuable to corporate purchasers than to non-corporate buyers.

Base Corporate Income Tax Rate—21 percent tax rate (effective for taxable years beginning after December 31, 2017).  No sunset provision.

Certain Foreign Source Income Earned from the U.S (“FDII”).—Intended to attract cross-border business back to the U.S., a tax rate lower than 21 percent is now imposed on certain excess returns earned by a U.S. corporation on the sale, license or lease of property or the provision of services to an unrelated foreign party for foreign use or consumption.  (Additional rules apply when the transaction is with a related party.)  In broad terms, the lower rate applies to the foreign source income from these transactions in excess of 10 percent of the corporation’s allocable depreciable tangible property basis.