FINANCIALLY-TROUBLED COMPANIES may get an unwelcome surprise.

FINANCIALLY-TROUBLED COMPANIES may get an unwelcome surprise.

June 01, 2003
FINANCIALLY-TROUBLED COMPANIES may get an unwelcome surprise.

US multinational corporations that own assets in other countries usually do so through offshore holding companies in Holland, Bermuda, the Cayman Islands or other similar jurisdictions. They do this in order to avoid having to pay US taxes immediately on their earnings from abroad. US taxes can be deferred until the earnings are repatriated to the United States. The companies must be careful in the meantime not to be make indirect use of the earnings in the US, as that would trigger an immediate US tax. An example of indirect use is where a US parent company borrows money and pledges the assets of its offshore holding company as security for the loan.

Financially-troubled US companies that have fallen behind on contributions to employee pension plans are in for an unwelcome surprise. A lien arises automatically against not only the US company, but also the assets of all offshore companies that are part of its “controlled group,” in favor of a federal agency called the Pension Benefit Guaranty Corporation if the US company fails to satisfy minimum funding requirements for its qualified retirement plans. This sudden “debt” to the PBGC — secured by assets of the offshore holding companies — could trigger immediate taxes to the US company on any unrepatriated earnings in its offshore holding companies up to the amount of the lien.

The US parent company may have no choice but to file for bankruptcy — not only for itself but also for its offshore holding companies — to avoid the tax. A bankruptcy filing creates in an automatic stay against enforcement or perfection of the lien by the PBGC.

Keith Martin