On May 22, 2019 the Treasury Department and the Internal Revenue Service released regulations (the “Final Regulations”) finalizing and making certain technical changes to proposed regulations (the “Proposed Regulations”, previously described here) issued last year under Section 956 of the Internal Revenue Code of 1986, as amended (the “Code”). The Final Regulations substantially adopt the language of the Proposed Regulations, but also introduce new provisions (supplemented by additional examples) addressing certain technical concerns and establishing rules that would apply to U.S. partnerships (including U.S. limited liability companies treated as partnerships for U.S. tax purposes) with U.S. corporate partners.


U.S. Corporations with Controlled Foreign Corporation (“CFC”) Subsidiaries. Under the Final Regulations, additional foreign credit support of loans made to U.S. corporations (including CFC guarantees, pledges of CFC assets and 100% CFC stock pledges to secure such loans) in many cases would not have adverse U.S. tax consequences. The terms of some existing credit agreements may require the borrower to provide this additional credit support. However, given the effective date provision (described below), borrowers may resist providing additional credit support prior to 2020.

U.S. Partnerships/LLCs with CFC Subsidiaries. In the case of a U.S. partnership (or U.S. limited liability company treated as a partnership for U.S. tax purposes), the Final Regulations generally only provide relief from the deemed dividend rules to the extent the equity of the partnership (or LLC) is owned by U.S. corporations. As a result, partnerships (or LLCs) with noncorporate U.S. shareholders may be reluctant to provide additional credit support.

Other Considerations. While the Final Regulations may in many situations eliminate the adverse U.S. tax consequences associated with providing additional foreign credit support, the parties would still need to consider the feasibility and potential cost of doing so, taking into account foreign tax, legal and other considerations.


Under Section 956, the guarantee by a CFC of a loan made to a “U.S. shareholder” of the CFC, or the pledge of 2/3 or more of the CFC’s stock to secure such loan, can give rise to a deemed dividend to the U.S. shareholder.

Under Section 245A of the Code (enacted in 2017), a U.S. parent corporation can generally receive dividends from a CFC subsidiary tax-free for U.S. federal income tax purposes through a 100% dividends-received deduction (provided it satisfies a one-year holding period requirement for the stock of the CFC). However, deemed dividends under Section 956 are not eligible for this deduction.

The Proposed Regulations attempted to allay this disparity for U.S. corporate shareholders that receive Section 956 deemed dividends from CFC subsidiaries. In general, the Proposed Regulations provided that the amount a corporate U.S. shareholder of a CFC would have to include in income as a deemed dividend under Section 956 would be reduced to the extent the shareholder would have been entitled to a dividends-received deduction under Section 245A if the dividend had been an actual rather than a deemed dividend from the CFC.


The Final Regulations adopt the general rule of the Proposed Regulations described above, which is designed to maintain symmetry between the taxation of actual dividends and the taxation of deemed dividends from a CFC to a U.S. corporate shareholder. The Final Regulations also make certain taxpayer-favorable technical changes to the Proposed Regulations to address concerns raised in published commentary, which pointed out situations in which the Proposed Regulations might not have operated as anticipated.

In addition, the Final Regulations include special rules for U.S. partnerships (including U.S. limited liability companies treated as partnerships for U.S. tax purposes) with U.S. corporate partners. Under these rules, a U.S. partnership’s deemed dividend inclusion generally would be reduced to the extent that one or more of its U.S. corporate partners would be entitled to a dividends-received deduction under Section 245A if the partnership received the deemed dividend amount as an actual distribution. The Final Regulations create a special allocation rule that is intended to ensure that the benefit of any deemed dividend exclusion is allocated solely to the U.S. corporate partners.


The Final Regulations apply to taxable years of a CFC beginning on or after July 22, 2019, and to taxable years of a U.S. shareholder in which or with which such taxable years of the CFC end.1 Accordingly, they will be effective for calendar-year CFCs beginning in 2020. Taxpayers may apply the Final Regulations to taxable years of a CFC beginning after December 31, 2017. However, this early application of the Final Regulations is subject to a general requirement that the taxpayer and all its U.S. affiliates consistently apply the Final Regulations with regard to all CFCs in which they are U.S. shareholders for the relevant taxable years.