IRS recently published proposed regulations under Section 956 (deemed dividend provision), with both good and bad news in further alignment with the US Tax Act enacted at the end of 2017. At that time, it was hoped that Section 956 would be abolished, but a late-breaking change in the final law was put in place for Section 956 to remain. This update achieves parity with the participation exemption system provided for dividend distributions.
- Good news: Corporate US shareholders are excluded from the application of Section 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and effective repatriations. Thus, the amount otherwise determined under Section 956 is reduced to the extent that the US shareholder had received a distribution qualifying for a Section 245A deduction from the CFC in an amount equal to the Section 956 amount. (i.e. the distribution still needs to be a dividend)
- Bad news: Section 956 is still in the Code, along with potential direct/indirect tax consequences from guarantees, loans, etc. To the extent such amount is not a “dividend” for US tax purposes, there are traps still present to warily avoid.
There are planning opportunities (i.e. tax consequences from a loan vs. an actual dividend, etc.), however there are also traps to avoid, so it is safe to assume that diligence is still required for this Code section.
A reference to the proposed Regulations are provided for reference.