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Changes to deemed dividend rules bring good news for secured creditors
Prior to the issuance of the final regulations under Section 956 of the Internal Revenue Code of 1986, a dividend was deemed created when a U.S. borrower pledged, as security for its obligations, two-thirds or more of the voting stock in a foreign subsidiary considered to be a “controlled foreign corporation” (CFC) or if the CFC guaranteed or pledged its assets as security for the U.S. parent’s obligations. The U.S. parent was required to include in its U.S. taxable income the lesser of (i) the total principal amount of the loan that was supported by the foreign subsidiary credit support, and (ii) the amount of such foreign subsidiary’s earnings and profits that previously have not been taxed in the U.S.
