There is often a significant possibility that a section 956 inclusion might occur as a result of CFC collateral.
The enactment of section 245A under the Tax Cuts and Jobs Act (TCJA)—providing for a 100% dividends received deduction (DRD) for certain distributions from a controlled foreign corporation (CFC)—along with the subsequent issuance of regulations that reduce the amount of any section 956 inclusion by the amount of a hypothetical section 245A DRD, have led some taxpayers and lenders to believe that no section 956 inclusion may result to U.S. multinational borrowers that pledge CFC stock or assets as collateral.
However, there is often a significant possibility that a section 956 inclusion might occur as a result of CFC collateral, despite the section 245A DRD, because of several exceptions that might apply, and in particular a possible “nimble dividend” exception to section 245A.
Read an August 2024 report* prepared by a KPMG LLP tax professional that describes situations in which U.S. multinational borrowers might incur a section 956 inclusion as a result of using CFC stock or assets as collateral, and discusses the factors that must be evaluated when providing such collateral, as well as the strategies that can be undertaken to avoid the inclusion.
*This article originally appeared in Tax Notes Federal (August 5, 2024) and is provided with permission.