Notice 2018-46 expands Section 956 exceptions for NPCs

Tax Hot Topics newsletterOn May 4, the IRS released Notice 2018-46, detailing plans to expand an exception of the definition of United States property under Section 956(c).

The regulations, to be issued at a later date, will apply to obligations held by controlled foreign corporations (CFCs). Under the expanded exception, to the extent the principal amount of an obligation of a U.S. person does not exceed the fair market value of cash and readily marketable securities received as collateral or payment for the obligation by a U.S. or foreign person that is a dealer in securities or commodities in the ordinary course of business, the payor of the collateral would not be viewed as having made an investment in U.S. property.

Furthermore, this exception will not be limited to obligations made on payments related to cleared notional principal contracts (NPCs) as originally provided in prior regulations. This decision comes in response to comments by taxpayers requesting clarification of the temporary regulations issued in 2015. The 2015 regulations broadened the exception of the definition of U.S. property to include obligations arising from payments with respect to uncleared NPCs. The temporary 2015 regulations expired on May 7.

Taxpayers will be permitted to rely on Notice 2018-46 for obligations arising before May 4 or on the full margin or cash collateral exception provided in the aforementioned 2015 regulations prior to the issuance of the new regulations.

Contact David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

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