Debtwire Radio

Traditionally, when structuring a US lending transaction, parties would omit guarantees and collateral support from a US borrower’s foreign subsidiaries in order to avoid the adverse tax impact under Internal Revenue Code section 956. It’s that potential penalty that led to, among other things, the ubiquitous credit agreement provision that limits borrowers’ pledge of the voting stock in any first-tier controlled foreign corporation to 66%. But all that changed on 23 May, 2019, when US tax authorities issued final regulations under Section 956 that reduced or eliminated the tax imposed on a “deemed dividend” concerning controlled foreign corporations that are subsidiaries of US corporations. As a result, US borrowers and lenders can now secure their loans with foreign collateral without the risk of attendant tax consequences. While this might appear to be all rainbows and unicorns for the institutional lender community, seeking to enforce liens against and foreclose upon foreign collateral could come with