The Strategic Use of Short‐Term Loans to Access Offshore Cash

Published date01 November 2015
Date01 November 2015
© 2015 Wiley Periodicals, Inc.
Published online in Wiley Online Library (
DOI 10.1002/jcaf.22095
The Strategic Use of Short-Term
Loans to Access Offshore Cash
Thomas D. Schultz and Roger Y. W. Tang
As established in
several previous
articles, Ameri-
can corporations have
accumulated signifi-
cant amounts of cash
offshore, resulting in
relatively high liquid-
ity balances (Cole,
2014; Le Guyader,
2011, 2012, 2014;
Marcum, Martin, &
Strickland, 2011).
U.S. corporations
have an incentive to
keep cash offshore
that is generated from
profitable operations
in relatively low‐tax,
foreign jurisdictions because
repatriations to the United
States can trigger significant
tax liabilities. In addition,
indefinitely postponing the
repatriation of foreign earn-
ings maximizes a corporation’s
after‐tax profits for financial
reporting purposes. However,
such reinvestments potentially
trap the related cash outside
the United States, where it is
not available to make dividend
payments, repurchase stock, or
invest in domestic operations.
In the management discussion
and analysis (MD&A) section
of Form 10‐K filings, many
U.S. corporations disclose
limitations on cash accessibil-
ity associated with repatriation
(Cole, 2014).
Given the magnitude of
cash held by foreign subsidiaries,
managers of U.S. multinational
corporations (MNCs) continue
to seek tax‐effective strategies
for utilizing offshore liquidity
balances. Le Guyader (2014)
addresses four principal actions
managers have taken in the
current environment, including
adding debt to the
balance sheet, rein-
vesting in foreign
operations, making
select repatriations,
and moving con-
solidated operations
out of the United
States. One addi-
tional strategy that
merits attention is
the use of short‐term
loans from subsid-
iaries operating as
controlled foreign
corporations (CFCs)
as permitted under
Internal Revenue
Code (IRC) §956.
This article examines how U.S.
corporations have successfully
structured short‐term loans
from their CFCs to access
offshore cash for domestic
purposes without generating
undesirable tax or financial
reporting consequences.
The United States gener-
ally taxes the worldwide income
of domestic corporations and
allows a credit for foreign income
In times of uncertainty, maintaining a strong
cash position generally enhances a corporation’s
financial flexibility; however, holding significant
cash balances offshore to avoid tax consequences
associated with repatriations can make the
amounts unavailable for use in the United States. A
viable, tax-effective strategy for U.S. multinational
corporations seeking to access offshore cash is
to structure short-term, intercompany loans from
their subsidiaries operating as foreign controlled
corporations. By coordinating the treasury and
tax functions in this area, corporations can suc-
cessfully address the applicable IRS rules while
providing liquidity to support domestic operations.
© 2015 Wiley Periodicals, Inc.
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