What Is a Rev 956 Inclusion for U.S. Shareholders?
Section 956 prevents tax deferral by treating a foreign corporation's U.S. investments, loans, or guarantees as a taxable deemed dividend to its U.S. shareholders.
Section 956 prevents tax deferral by treating a foreign corporation's U.S. investments, loans, or guarantees as a taxable deemed dividend to its U.S. shareholders.
The phrase “Rev 956” is commonly used to refer to Section 956 of the U.S. Internal Revenue Code. This section establishes an anti-deferral rule that affects United States shareholders of foreign corporations. Its primary purpose is to tax these shareholders when the foreign corporation’s earnings are effectively brought back into the U.S. through specific types of investments. This tax occurs even if the corporation does not pay a formal dividend, preventing shareholders from indefinitely deferring U.S. tax on foreign earnings that are enjoyed within the United States.
The core of Section 956 involves two key entities: a Controlled Foreign Corporation (CFC) and a “U.S. Shareholder.” A CFC is a foreign corporation where more than 50% of its stock is owned by U.S. shareholders. A U.S. Shareholder is a U.S. person, such as a citizen, resident, or domestic corporation, that owns 10% or more of the total combined voting power or the total value of the shares of a foreign corporation.
When a CFC makes an investment in what the code defines as “United States property,” its U.S. Shareholders can be subject to a “Section 956 inclusion.” This is often called a “deemed dividend” because the shareholder must include a portion of the CFC’s earnings in their taxable income for the year, even though no actual cash has been received. However, the ultimate tax impact of this inclusion now depends significantly on whether the shareholder is a corporation or an individual.
The trigger for a Section 956 inclusion is the CFC’s investment in “United States property.” The most straightforward example is tangible property physically located within the United States, such as real estate, equipment, or inventory. It also includes the stock of a related domestic corporation or the right to use intellectual property, like patents or copyrights, in the U.S.
A frequent trigger is an obligation of a U.S. person, which most commonly takes the form of a loan from the CFC to its U.S. shareholder or another related U.S. entity. Beyond direct loans, certain indirect credit support arrangements are also treated as investments in U.S. property. For instance, if a CFC guarantees a loan taken out by its U.S. parent corporation or pledges its assets or stock to secure the parent’s debt, this is treated as an investment in U.S. property.
For a non-corporate U.S. shareholder, such as an individual, the taxable amount is generally the lesser of two figures: the shareholder’s pro-rata share of the average amount of U.S. property held by the CFC during the year, or their share of the CFC’s “applicable earnings.” Applicable earnings are essentially the CFC’s accumulated and current earnings and profits that have not yet been taxed in the U.S. The shareholder must include the smaller of these two amounts in their gross income.
For a corporate U.S. shareholder, while the initial calculation is the same, the resulting amount is then reduced by a deduction that the corporation would have been entitled to if the amount had been distributed as an actual dividend. Because this deduction is often 100% of the included amount, the final taxable income from a Section 956 inclusion for a corporate shareholder is frequently zero.