The Internal Revenue Service (IRS) has announced that it is correcting Notice 2008-91, issued recently on October 3, 2008, so that the relaxed rules for short-term inbound loans from controlled foreign corporations (CFCs) will not apply to taxable years beginning after December 31, 2009. Notice 2008-91 originally stated only that the new rules would be available for the first two taxable years ending after October 3, 2008.
Notice 2008-91 increases the opportunities for a US-based corporation to borrow money from a controlled foreign subsidiary without triggering tax on a deemed dividend. The IRS issued this guidance for the express purpose of assisting companies in facilitating liquidity to fund their operations during these challenging financial times.
Generally, an obligation owed to a CFC by its US-based 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, the IRS provides temporary relief by expanding the exclusion provided in Notice 88-108. This temporary relief increases the time that a CFC can lend money into the United States 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 lend funds to its US parent provided that the 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, as corrected on October 16, 2008, applies only to the first two taxable years of a CFC ending after October 3, 2008 but not including any taxable year beginning after December 31, 2009. 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. Similarly, if a CFC is organized on June 30, 2009 with a tax year ending June 30, the relief applies only to the CFC's taxable year ending June 30, 2010, because all of the CFC's subsequent tax years will begin after 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 unclear how the IRS will treat inbound lending when the loan is repaid within 60 days but then lent again within a short period of time. The IRS has criticized this practice in the past; thus, such serial loans could be subject to challenge as falling outside the safe harbors of Notices 88-108 and 2008-91. The IRS has not commented on how long a CFC must wait between making loans.