The US Internal Revenue Service (IRS) is to take an American company with a Bermudian arm to court in a bid to tax a $357 million loan.

And — if the US taxman is successful — the case could have wide-reaching implications for other major US firms that use international subsidiaries to do business.

The US Tax Court case centres around the use of Bermuda HoldCo by US firm Paradym, owned by the Illinois Tool Works, to make a loan to its European subsidiary, Europe HoldCo.

According to the US National Law Review, Bermuda HoldCo in 2006 lent the cash to European HoldCo.

The Review said that the loan was unsecured, had a term of five years and included a fixed interest rate, as well as being “properly documented and $20 million of interest was paid each year as required by the loan documents.

“Europe HoldCo then made a distribution of the same $357 million to Paradym.”

But the IRS in 2010 said that the Bermuda HoldCo loan was a dividend — which gave European HoldCo to have $357 million in earnings and profits and should be treated as a taxable dividend.

The IRS further argued that Paradym had a zero basis in its European HoldCo shares, which would result in the European HoldCo’s distribution being treated as a taxable capital gain.

But Paradym argued that the distribution was not a dividend because Europe HoldCo had no earnings and profits and that the distribution should offset Paradym’s $1.1 billion basis in its European HoldCo shares.

The National Law Review article added: “As evidenced by the increasing number of inversions by US multinationals, repatriation of offshore profits has been and will continue to be a significant issue.

“Should the IRS be successful in Illinois Tool Works, a large number of US multinationals will be affected as this type of repatriation strategy is a common planning technique.”