To Facilitate Liquidity, IRS Extends Exclusion Period for Loans to U.S. Shareholders by Controlled Foreign Corporations

October 15, 2008

The Internal Revenue Service has temporarily extended from 30 days to 60 days the period in which a controlled foreign corporation (a “CFC”) can lend money to its United States shareholders without resulting in U.S. taxation to those shareholders.[*]

Generally, subject to certain limitations and exceptions, the U.S. shareholders of a CFC must include in income their pro rata shares of the CFC’s earnings that are invested in “United States property” for the taxable year. If a CFC loans money to its U.S. shareholders, all or part of the loan receivable held by the CFC (at the end of a quarter) may constitute United States property, and thereby require the U.S. shareholders to include currently in taxable income a portion of the CFC’s earnings.

The IRS had previously granted an exception for certain short-term loans. Under that exception, the term “United States property” would exclude loan receivables held by a CFC at quarter-end, if the loan is collected within 30 days of its issuance. This exception was unavailable, however, if the CFC held for 60 or more calendar days during the taxable year obligations that, without regard to the 30-day rule, would constitute investments in United States property.

In Notice 2008-91, the IRS temporarily increased the 30-day period to 60 days. Thus, a CFC may now elect to exclude an obligation payable by its U.S. shareholders if it is collected within 60 days from the time it is incurred. The exception does not apply, however, if the CFC holds for 180 or more calendar days during the taxable year loan receivables that, without regard to the 60-day rule, would constitute investments in United States property.

This liberalized rule will only apply for the first two taxable years of a CFC ending after October 3, 2008. Thus, if a CFC has a calendar year, the rule applies for its taxable years ending December 31, 2008 and December 31, 2009.


NOTE:

*Generally, a foreign corporation is a “controlled foreign corporation” if more than 50% of (i) the total combined voting power of all classes of its voting stock, or (ii) the total value of its stock, is owned, or considered as owned, by United States shareholders on any day during its taxable year. A United States shareholder is a U.S. person who owns, or is considered as owning, 10% or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation.

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