The Internal Revenue Service recently issued guidance increasing the opportunities for a US corporation to borrow money from a controlled foreign subsidiary without triggering tax on a deemed dividend. The Service issued this guidance for the express purpose to assist companies in facilitating liquidity to fund their operations during these challenging times.
Generally, an obligation owed to a controlled foreign corporation (CFC) by its US parent is treated as an investment in US property and, thus, one type of potential deemed dividend subject to current tax for the US parent. The longstanding general exclusion to such treatment published in Notice 88-108 in 1988, addressed an obligation that would otherwise constitute an investment in US property if the obligation was collected within 30 days from the time it is incurred provided that the lending CFC does not hold all such obligations for 60 days or more in the calendar year.
In Notice 2008-91, issued on Friday, October 3, 2008, the Service provides temporary relief by expanding the exclusion provided for in Notice 88-108. This temporary relief increases the time that a CFC can lend money into the US to its US parent, for example, from 30 to 60 days and increases the total time during a taxable year that a CFC can hold such obligations from a period of less than 60 days to a period of less than 180 days. Thus, a CFC may loan funds to its US parent provided that such loan is repaid within 60 days and the total number of days in a taxable year that the CFC has all such loans outstanding is less than 180 days.
The temporary relief in Notice 2008-91 applies only to the first two taxable years of a CFC ending after October 3, 2008. Thus, if a CFC has a calendar tax year, the relief applies for the CFC's taxable years ending December 31, 2008, and December 31, 2009. The general rules regarding exclusion in Notice 88-108 will otherwise continue to apply to subsequent tax years.
Importantly, it is still not clear how the Service will treat inbound lending where the loan is repaid within 60 days but then lent again within a short period of time. The Service has criticized this practice in the past and thus such serial loans could be subject to challenge as falling outside the safe harbors of Notices 88-108 and 2008-91. The Service has not commented on how long a CFC must wait between making loans.
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