In order to avoid this tax risk, credit contracts including a U.S. company as a borrower have generally been designed to exclude CFCs as guarantors, to exclude collateral from an EFA`s assets, and to limit any collateral of an EFA`s assets to no more than 65% of the voting stock. These provisions were often considered equivalent to those of CFCs of national subsidiaries whose assets other than the shares of one or more controlling companies were not excluded from FCC. This has generally been recognized as a bad result, and there has long been a market practice for collateral assistance for long-standing U.S. debt facilities. Major U.S. subsidiaries would provide guarantees and guarantees, as long as it was appropriate for credit taking, but not foreign subsidiaries. In addition, a commitment of more than two-thirds of a CFC`s voting interests was interpreted as justifying the same concern, so that only 65% of the shares of foreign subsidiaries of the first level, voting, would be provided. While further guidelines are needed to clarify the IRS`s position, parties may, in the meantime, attempt to include language in credit contracts with U.S. partnership borrowers that allow for increased foreign credit support if future changes to legislation (including proposed regulations or other guidelines on which taxpayers can rely on) should reduce or eliminate negative tax consequences for the borrower.
Until recently, the structuring of borrowing for U.S. borrowers with foreign subsidiaries was largely fuelled by the IRS` interpretations of Section 956 of the Internal Revenue Code, leading to significant tax inefficiencies when foreign subsidiaries had to guarantee the debt of a U.S. borrower or support other guarantees. As a result of these rules, borrowers and creditors in U.S. debt markets have generally agreed that credit and security assistance should stop “at the border.” These new rules are complex and require careful consideration to determine whether the exemption described above applies to a particular corporate tax payer.