Should an Australian loan to US operations go to your US blocker? Or directly to your US trading entity?
Australian Loan to US
Let’s say your Australian holding wants to give a loan to its US operations. How should you structure this loan? Should the Australian holding loan to your US blocker or directly to your US trading company?
That is the question Marsha Dungog of Withers in San Francisco will discuss with you in this episode. Here is what we learned. But Marsha Dungog explains all this much better than we ever could, so please listen in.
Australian Loan to US
Let’s assume your Australian holding holds 100% of a Delaware C-Corp which you use as your US blocker. And then this blocker holds 20% of an LLC with the other 80% held by a US holding, called HoldCo.
Whoever receives the loan from the Australian Holding, will need to receive Form W-8-BENE from the Australian Holding. W-8-BENE will tell the recipient of the loan what tax to withhold from any interest payments.
The form is not actually filed with the IRS, but just tells the loan recipient to withhold 10% from any interest payments it makes to Australia.
Loan to Blocker Corp
If the Australian holding loans to the blocker, Form 5472 will report this loan to the IRS. The blocker needs to file Form 5472 anyway since it has at least 25% foreign ownership. So the loan won’t change that. But the loan just means that there is more to report in the 5472.
Loan to LLC
If the Australian holding loans directly to the trading entity, the LLC reports the loan and interest payments to the IRS through Forms 1042-T, 1042-S and 1042.
So reporting-wise it doesn’t matter whether you go via the blocker or directly to the LLC. Either Form 5472 or 1042 will pick it up and report it to the IRS.
Loan or Capital
The issue with any cross-border loan is that the IRS might see these loans as a capital contribution. So it is really important that you charge and pay interest rates at market, not slightly below or above but right at market.
Interest above market will look like a repatriation of profits. Loans with an interest below market are at risk of being treated as a capital contribution by the IRS. So you are damned if you do and damned if you don’t.
Just like Australia, the US has Thin Cap rules.
The advantage of giving the loan to the blocker is that – in case of a loan default – you have a US entity trying to get their money back and not a foreign creditor.
The majority shareholder – so in this case the US HoldCo – will dictate the accounting method for the LLC. So if the HoldCo uses cash accounting, that is what the LLC would use to account for the interest payments it makes.
Disclaimer: Tax Talks does not provide financial or tax advice. All information on Tax Talks is of a general nature only and might no longer be up to date or correct. You should seek professional accredited tax and financial advice when considering whether the information is suitable to your or your client’s circumstances.
Last Updated on 27 October 2021