United States: Proposed Regulations Change Calculus Of Section 956's "Deemed Dividend" For US Corporate Shareholders

Last Updated: November 8 2018
Article by Steven D. Garden, David J. Goett and Remmelt Reigersman

On October 31, 2018, the US Internal Revenue Service ("IRS") released proposed regulations ("Proposed Regulations") that, if finalized, may substantially impact the way in which multinational corporations finance their operations. The Proposed Regulations' stated goals are aimed at maintaining taxpayer neutrality between repatriating cash of offshore subsidiaries through the use of (a) distributions, or (b) investments by the subsidiary in U.S. property.  However, the Proposed Regulations also have the effect of denying indirect foreign tax credits that may otherwise be available in respect of a Section 956 inclusion.

Historically (i.e., prior to January 2018), taxpayers could achieve some level of deferral with respect to offshore earnings through the use of an offshore corporate subsidiary.  Under the Subpart F regime, US shareholders (i.e., 10% owners by vote1) of a "controlled foreign corporation" ("CFC") (a foreign corporation owned more than 50% by U.S. Shareholders) generally were only subject to immediate taxation on certain categories of passive and related-party income derived by the CFC.  Other income generally was not taxed to U.S. Shareholders until the earnings were actually distributed to the shareholders. 

An important exception to this rule is found in Section 956, which generally results in a taxable inclusion to US shareholders if a CFC invested its earnings in "U.S. property." A CFC investment in US property could take place where the CFC purchased stock of a US shareholder, loaned cash to a US parent or guaranteed or otherwise supported borrowing by a US parent, or acquired tangible or intangible property located or used in the United States. Congress viewed a CFC's investment in US property as an "effective repatriation of earnings," which should result in taxing US shareholders in the same manner as if the CFC had actually distributed cash to them. Thus, Section 956 was intended to prevent taxpayers from circumventing income recognition by repatriating cash through means other than a dividend. Both actual distributions by the CFC and "effective repatriations" under Section 956 resulted in taxable income to the CFC's US shareholders.

In December 2017, Congress enacted the (commonly called) Tax Cuts and Jobs Act and broke the parity between actual distributions and "effective repatriations" under Section 956 by passing Section 245A, which generally allows corporate shareholders a 100% dividend-received deduction on dividends received from a foreign corporation in which they hold at least a 10% interest by vote or value. Surprisingly, Congress did not, however, repeal Section 956. Furthermore, the dividends-received deduction under Section 245A did not apply to Section 956 inclusions because a Section 956 inclusion is not technically a dividend.2 The net result was that an actual repatriation of cash from a foreign corporation to a 10% corporate shareholder was tax-free in the United States, but a deemed repatriation of cash was subject to tax. This is not necessarily a detriment (and can actually be beneficial) because Section 245A(d) disallows foreign tax credits associated with the dividend while Section 960(a) appears to allow foreign tax credits in respect of Section 956 inclusions.

The Proposed Regulations seek to re-establish the equivalence between actual distributions and Section 956 inclusions by allowing US corporate shareholders to take advantage of the Section 245A dividends-received deduction principles with respect to deemed inclusions under Section 956.  Therefore, assuming that the Proposed Regulations are finalized in substantially the same form, both actual repatriations and deemed repatriations would be tax-free in the United States to 10% corporate shareholders (assuming the requirements of Section 245A are met), without associated foreign tax credits brought up to the US corporate shareholder.

The Proposed Regulations accomplish this result by providing that the amount otherwise included under Section 956 is reduced to the extent that the U.S. shareholder would be allowed a deduction under Section 245A if the shareholder had received a distribution from the CFC in an amount equal to the Section 956 inclusion.3 While some Section 956 inclusions can remain on account of Section 245A's nuances, in many (if not most) cases involving a 10% corporate shareholder, these rules will exempt Section 956 inclusions from US tax. The Proposed Regulations illustrate several fact patterns under which there could still be partial or total Section 956 inclusions—taxpayers desiring to utilize foreign tax credits may wish to consider these fact patterns carefully. 

Importantly, Section 956 will continue to apply to non-corporate shareholders because non-corporate shareholders are not entitled to the Section 245A deduction. The Proposed Regulations seek comment on the application of these rules to US shareholders that are domestic partnerships, which may have partners that are domestic corporations, individuals or other persons. The Proposed Regulations note two possible treatments of domestic partnerships under the new rules. The first approach would allow the domestic partnership to reduce a Section 956 inclusion to the extent its corporate partners would be entitled to a deduction under Section 245A. The second approach would render the new rules inapplicable to the domestic partnership entirely but allow a corporate partner a deduction under Section 245A on its distributive share of partnership income attributable to the Section 956 inclusions.

Section 956 will continue to apply to corporate entities that are not eligible for the Section 245A dividends-received deduction, such as regulated investment companies and real estate investment trusts.

The preamble to the Proposed Regulations addresses at some length why Treasury believes it has authority under Section 956(e) to make such a substantial change (which may make Section 956 inapplicable to the overwhelming percentage of investments in US property).

The Proposed Regulations apply to taxable years of a CFC beginning on or after the date on which the final regulations are published in the Federal Register and to the taxable years of a US shareholder in which or with which such taxable years of the CFC end.  Taxpayer are entitled to rely on the Proposed Regulations prior to their effective date and with respect to taxable years of CFCs beginning after December 31, 2017, provided that the taxpayer and its related persons consistently apply the Proposed Regulations with respect to all CFCs in which they are U.S. shareholders.

b>Impact on Financing Transactions. As discussed above, Section 956 loomed large in the context of financing transactions because of the way that it defined "investments in U.S. property." In general terms, under Code section 956 and the regulations thereunder, an obligation of a US borrower to a third-party lender is considered an investment in US property if: (1) stock representing two-thirds (66 2/3%) or more of the voting power of such borrower's CFC is pledged to the lender advancing loans to the US borrower; (2) the borrower's CFC guarantees payment of loans made to the US shareholder; or (3) the borrower's CFC grants a security interest to the lender in any of its assets (including the stock of lower-tier subsidiaries) to secure the loans to the US shareholder. To avoid a Section 956 inclusion, loan agreements typically (A) only require 65% or 66% of the voting stock of a first-tier CFC (or a US holding company whose material assets all of which constitute CFC stock (a "CFC holdco")) to be pledged to a lender to secure the US borrower, (B) provide that any CFC or CFC holdco is not required to guarantee the US borrower's obligations (or to be liable thereon on a joint and several liability basis) and (C) provide that any CFC or CFC Holdco is not required to pledge its assets (including the stock of lower tier  subsidiaries) to secure the US borrower's obligations (such collateral and guarantee limitations, the "956 Limitations").

The Proposed Regulations would substantially eliminate the impact of Section 956 on corporate lending transactions (which include a limited liability company that elected corporate classification).  Under the Proposed Regulations, where there is certainty that the borrower is a pure corporate entity, it may be possible to provide a more expansive collateral package without running afoul of the previous Section 956 deemed dividend concerns.  Notwithstanding such fact, the viability of any such enhanced collateral and guarantee package would have to be considered in light of the costs and ultimate enforceability of pledges and guarantees in foreign jurisdictions.

In lieu of the 956 Limitations described above, certain existing loan agreements provide a simpler formulation that requires that all directly and indirectly held assets must be pledged and that all direct and indirect subsidiaries must become guarantors of the US borrowing, except, in each case, to the extent that it would cause a material adverse tax event to the borrower.  The application of any such provisions to a purely corporate borrower would need to be reevaluated in light of the Proposed Regulations because the Proposed Regulations could eliminate a potential material adverse tax event and therefore give rise to an immediate requirement to provide a pledge and/or guarantee.  As a result, it will be important for many existing US borrowers to review their loan agreements to establish whether they could be in default if they do not provide all such pledges and/or guarantees and to take related actions such as providing corporate resolutions and legal opinions and perfecting liens during such period, automatically upon implementation of the Proposed Regulations.

As mentioned above, the Proposed Regulations do not apply to non-corporate entities.  Thus, in many (if not all) situations in which the borrower is an individual or an entity treated as a partnership that has non-corporate 10% US shareholders, the 956 Limitations will likely need to be retained.  In addition, the various fact patterns under which there may still be Section 956 inclusions must be taken into account.

Impact on Planning Considerations. The Proposed Regulations also impact tax planning. Prior to the Proposed Regulations, the rules resulted in disparate treatment of actual distributions versus Section 956 inclusions, particularly in the foreign tax credit context. While actual distributions no longer result in US corporate shareholders being deemed to have paid a portion of the foreign subsidiary's foreign taxes, Section 960 does allow an indirect credit for inclusions under Section 951(a)(1) (which includes subpart F income and Section 956 inclusions). Although not entirely clear, a Section 956 inclusion, as a result, appears to bring with it indirect foreign tax credits to US corporate shareholders.  This means that a US corporate shareholder may be able to access different consequences depending on an actual versus a deemed repatriation.  The Proposed Regulations would foreclose this possibility with respect to any amounts that give rise to a Section 245A dividends-received deduction and, thus, can be detrimental to taxpayers (although it appears that foreign tax credits may still be accessed through Section 956 inclusions in the 2018 and 2019 tax years given that, unless a taxpayer elects to consistently apply the Proposed Regulations to each of its CFCs, the rules would only become effective for tax years beginning after the publication of the final regulations, which is unlikely to occur until 2019).  Some taxpayers may wish to consider structuring in a way that the Proposed Regulations would not apply to them.

CFCs generally now would be able to invest directly in the United States, such as by acquiring businesses or property in the United States or lending cash directly to their US parents. This may be a desirable alternative to distributing dividends up the chain of ownership (because of foreign income and withholding taxes that may be imposed). However, taxpayers would need to carefully analyze a number of considerations in connection with these alternatives, including  US source of income, effectively connected income/permanent establishment rules and branch profit tax rules.  Specifically with respect to the lending of cash by a CFC to its US parent, taxpayers would want to consider US withholding tax implications under applicable US tax treaties, limitations on the deductibility of the US parent's interest and US and foreign taxation of the CFC's interest income.


1 After the passage of the (commonly called) Tax Cuts and Jobs Act, the definition of a "US shareholder" was changed to include any US person that owns 10% or more of a foreign corporation by vote or value.

2 See Rodriguez v. Commissioner, 722 F.3d 306 (5th Cir. 2013).

3 Generally, if the US shareholder owns the stock of the CFC indirectly, the requirements of Section 245A will be tested as if the US shareholder owned the stock directly (a "hopscotch" approach), except that the hypothetical distribution will be deemed to have been made through the chain of CFCs for purposes of applying the rule that denies the deduction for hybrid dividends.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions