It may be advantageous to finance high-tax foreign subsidiaries in a way that maximizes interest deductions and minimizes dividend payments. The potential advantage of debt financing provided by a U.S. parent include a deduction in the high-tax foreign country for interest paid to a U.S. parent corporation as well as the possibility of lower foreign withholding taxes on interest payments, as opposed to dividend distributions. To secure the benefits of debt financing, the business must ensure that any intercompany payments meant to be interest qualify as such under the Internal Revenue Code. The rules for determining whether an intercompany payment is debt and not equity is not clear. To make matters more complicated, the Internal Revenue Code imposes rules known as earnings stripping provisions that may disallow the deductibility of interest payments. The San Francisco debt financing attorneys at Diosdi Ching & Liu, LLP have advised domestic and foreign corporations regarding cross-border debt financing and have executed such plans. Contact us now for a free consultation!
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