Reconciling U.S.-Foreign Intercompany Accounts to Avoid Taxable Deemed Dividends Under Section 956

Description

An important task for corporate tax professionals is annually reconciling and clearing intercompany A/R and A/P balances. Many companies carry forward intercompany balances between the U.S. parent and its foreign subsidiaries from year-to-year, leading to a potentially taxable “deemed dividend” under IRC Section 956. Unanticipated tax consequences can result from failing to maintain these intercompany accounts.

One situation that can trigger a deemed dividend occurs where the U.S. parent company books a net payable from a foreign subsidiary, and the payable remains outstanding beyond normal payment terms. In these circumstances, the payable may be considered a loan from the foreign subsidiary to the U.S. company. This loan is treated as a taxable deemed dividend because it is viewed as a repatriation of money to the U.S.

While much attention is given to structuring intercompany transactions, improper management of intercompany balances often impacts U.S. companies’ tax provisions as well as their actual tax liabilities. Tax professionals must understand the rules to avoid a costly deemed dividend, as well as know best practices for maintaining these intercompany accounts.

Listen as our experienced panel of tax experts provides a thorough exploration into how to properly maintain and manage intercompany balances using tools such as an enterprise resource planning (ERP) system, and presents guidance on what must be done to avoid deemed dividend tax consequences.