Some U.S. companies have significant earnings offshore in their Controlled Foreign Corporations (CFCs) that have not been distributed as dividends. To avoid taxable dividend distributions of the Earnings and Profits (E&P) back to the U.S. Parent (USP), some companies may attempt to use short term loans from the CFCs to related U.S. group companies to achieve economic repatriation of the foreign earnings.
The IRS has established a Practice Unit to examine the short term loan exclusion from the definition of U.S. Property, and whether such loans may trigger an income inclusion under IRC Section 951. It looks both at the issue of whether the relatively "mechanical" rules for the short term loan exception are met as well as at the more complex issue of whether a series of short term loans is being used in an attempt to circumvent IRC Section 951.
A loan to a related U.S. person held by a CFC at the end of a quarter may not trigger an inclusion under Subpart F if the loan is repaid within 30 days from the time it is incurred (“30-day exception”). This exception applies only if the CFC does not hold for 60 or more days during its taxable year any obligations of related U.S. persons that would be subject to IRC §956 (“60-day limitation”). Generally, if a CFC holds an obligation of a related U.S. person at the end of a quarter of the CFC’s tax year, the CFC will be considered to hold U.S. property. However, pursuant to certain Notices issued by the IRS, short term obligations of a related U.S. person may be excluded from the definition of US property. For the short term loan exception to apply to a CFC’s tax years ending before October 4, 2008 and beginning on or after January 1, 2011:
The obligation of the related U.S. person must be collected by the CFC within 30 days from the time the obligation is incurred (excluding the date of issuance, and including the date of repayment); and
The CFC must hold obligations of related U.S. persons for less than 60 days during the CFC’s tax year.
Whether the related US person executes and repays each obligation to its CFC as a separate, independent transaction. If not, multiple obligations may be collapsed into a single obligation for purposes of IRC Section 956.
Read more at: Tax Times blog