Proposed IRS Regulations Would Largely Eliminate “Section 956 Deemed Dividends” for U.S. Multinationals and Expand the Range of Credit Support From Non-U.S. Subsidiaries That They Can Provide to Lenders

November 1, 2018

Under proposed regulations issued on October 31, 2018, U.S. multinationals would generally be relieved from the “Section 956 deemed dividend rules” that have significantly limited their ability to provide lenders with credit support (for example, in the form of guarantees and collateral) from their non-U.S. subsidiaries.

In general, under the proposed regulations, the credit packages provided to lenders will no longer need to exclude upstream guarantees from non-U.S. subsidiaries or limit the amount of foreign subsidiary stock that may be pledged to support the borrowing to 65% of the stock of first-tier foreign subsidiaries.

While the rules are in proposed form, taxpayers can rely on them for the tax years of their foreign corporations that start after December 31, 2017. However, many U.S. multinationals may prefer to continue to include existing limitations in their financing agreements until the regulations are finalized, and eventually to replace them in future agreements with narrower limitations targeted at those situations to which the Section 956 deemed dividend rules may continue to apply. Other reasons for continuing to exclude some or all non-U.S. collateral may continue to exist, including higher cost of granting and perfecting security interest, local legal limitations and lesser protections for secured lenders.