Loans To U.S. Borrowers - Deemed Dividend Problem With Credit Support From Non-U.S. Subsidiaries

When non-U.S. subsidiaries of a U.S. borrower provide credit support for loans made to their U.S. parent, unexpected and often significant U.S. tax costs can result. When structuring lending and credit support arrangements that involve U.S. borrowers and non-U.S. credit support, both borrowers and lenders should consider how to avoid unintentionally giving rise to these potential costs.

The Deemed Dividend Problem

Under U.S. federal income tax rules, certain credit support provided by non-U.S. subsidiaries of a U.S. borrower can cause the U.S. parent to be deemed, for U.S. tax purposes, to receive an annual dividend from the non-U.S. subsidiary to the extent of that subsidiary's earnings (generally up to the amount of the loan). Such deemed dividends can have significant adverse tax consequences for the U.S. parent, since they can cause non-U.S. earnings that might not otherwise be subject to U.S. tax to become subject to U.S. tax prior to those earnings actually