Tax details of the U.S. CARES Act for foreign investors

The President of the United States on Friday March 27, 2020 signed into law the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act. Among a host of provisions designed to stimulate the economy, including direct payments to taxpayers below certain income thresholds, expansion of unemployment and other benefits, and loan and other targeted economic programs, the CARES Act contains two corporate tax provisions that may be relevant to foreign investors in the United States.

Deductibility of interest payments

The first temporarily relaxes the earnings-stripping limitation of U.S. Code Section 163(j) by increasing the limit on the ability to deduct interest payments from 30 percent of EBITDA to 50 percent for the 2019 and 2020 taxable years, and allows a taxpayer to elect to use its taxable income for 2019 instead of 2020 to calculate its 2020 limit.

These rules may indirectly benefit foreign investors who have invested in U.S. corporations or non-U.S. corporations earning income effectively connected with a U.S. trade or business that, in either case, have third-party or shareholder debt, as these corporations may now have less taxable income than would previously have been the case.

Carryback of net operating losses

In addition, the CARES Act reinstates the ability for a corporate taxpayer to carryback net operating losses incurred in the 2018, 2019, or 2020 taxable year to the previous five years, which can result in a refund of taxes paid in those years rather than having to carry those losses forward to use in future years.

These carryback rules can therefore have immediate cash flow benefits to taxable corporations that have recent net operating losses but paid U.S. federal income taxes in prior years.

Read all our coronavirus-related updates on our COVID-19 guidance for organizations resource page.