Controlled Foreign Corporations: The Deemed Dividend Dilemma

When advising a borrower incorporated or formed in the United States, one of the many characteristics of the borrower that a finance lawyer needs to consider is its client’s foreign subsidiaries. In particular, there are tax considerations to be aware of if a borrower has any foreign subsidiaries that are so-called controlled foreign corporations (CFCs).

The potential consequences of any missteps in advising corporate borrowers with CFCs can be significant. This was recently put into stark relief when a borrower sued its law firm for legal malpractice as a result of an unanticipated $463 million tax bill the client incurred as a result of the way the firm had drafted the credit agreement.

This course will explain the significance of CFCs, set out the purpose of Section 956 of the Internal Revenue Code and describe how this section impacts foreign subsidiaries of a US borrower in cross-border finance transactions. The aim of the course is to provide the legal practitioner with tools when drafting credit documentation to protect borrowers with foreign subsidiaries.

The session will be led by Gabriel Yomi Dabiri, an attorney in the Finance & Projects group of Morrison & Foerster LLP. Mr. Dabiri is admitted to the New York State bar and qualified as a solicitor of the Supreme Court of England and Wales.

Learning Objectives

1. Discuss the recent case of Overseas Shipholding Group, Inc., 130 A.D.3d 415 (2015)

2. Recognize how to identify a CFC

3. Understand how CFCs are impacted by Section 956 of the Internal Revenue Code

4. Consider suggestions for dealing with deemed dividends in finance documentation when CFCs are involved

5. Examine recent developments as they pertain to Section 956 of the Internal Revenue Code