global Tax New Reg: Foreign Partnership Loans to Repatriate Trapped Cash October 06, 2015 U.S. multinationals regularly use combinations of foreign corporations and partnerships within their global structure. U.S. multinationals regularly use combinations of foreign corporations and partnerships within their global structure. Different combinations of these types of entities can be employed with a powerful effect. A common result is “trapped” foreign cash and earnings that the U.S. parent cannot efficiently repatriate to the U.S. – thus the cash is trapped outside of the U.S. Consequently, U.S. multinationals with trapped foreign cash are constantly looking for ways to bring the cash back to the U.S. in a tax efficient manner. A logical and relatively simple mechanism to make the foreign cash available to the U.S. parent company would be a loan from a foreign subsidiary to the parent. The U.S. Treasury, seeing the potential for tax avoidance or abuse, implemented Section 956, Investment of Earnings in United States Property, in 1962. The statute has since been updated and various regulations issued to further refine its application. On September 1, 2015, new Temporary Regulations were issued by the IRS and Treasury Department that include Section 1.956-1T(b)(5). This new section is intended to address a specific type of cash repatriation strategy, typically involving a controlled foreign corporation with trapped foreign cash and a related foreign partnership. As an example, consider a cash rich controlled foreign corporation (“CFC”) that makes a loan to a related foreign partnership. The related foreign partnership has a U.S. partner that is also related to the CFC, perhaps being its sole shareholder. The foreign partnership then makes a partnership distribution to the US partner. Absent the loan from the related CFC, the foreign partnership would not have otherwise had the cash wherewithal to make the partnership distribution. The partnership distribution is considered a return of the partner’s capital that is not subject to U.S. tax upon receipt. Because the entities involved in the series of transactions are all related, one can see that this hypothetical transaction could be readily structured with the intent of tax avoidance. To bring trapped foreign cash of the CFC back to the U.S. without currently paying U.S. tax on the repatriated amount, the partnership could be used as a conduit due to a lack of clear guidance under existing law. The temporary regulations introduce an approach to tax the repatriation of this cash through the use of a “but for” test. If the partnership would not have made the distribution but for the loan that it received from the related CFC, then the CFC loan to the foreign partnership will be treated as an obligation of the US partner – an investment in United States property that may cause a current income inclusion to the U.S. partner and shareholder. Of course, facts and circumstances are rarely so neat; the determination of the amount that would not have been distributed but for the loan may not be so easily determined. This new temporary regulation section applies to transactions entered into on or after September 1, 2015. The rules for Investment of Earnings in United States Property are complex and catch many U.S. taxpayers by surprise. If you have intercompany loans to the U.S. from a foreign affiliate, or other assets that could be investments in U.S. property, in your business structure, the U.S. tax considerations should be carefully evaluated. Questions? Contact a member of our Global Tax Services Group.