The IRS and Treasury have issued final regulations (TD 9792) under the subpart F provisions. The final regulations adopt, with some changes, the temporary and proposed regulations published under Section 956 on September 2, 2015. The temporary and proposed regulations published on the same date under Section 954 are adopted with no changes. With the final regulations, the IRS and Treasury also issued proposed regulations under Section 956 (REG-114734-16) outlining how to determine the amount of US property that a CFC holds through a partnership.

In brief, the regulations provide the following:

1. Like the temporary regulations, the final regulations provide that the Section 956 anti-abuse rule may apply when a foreign corporation or partnership controlled by a controlled foreign corporation (CFC) is funded by any means (not just by capital contributions or debt). The tax attributes (for example earnings and profits, and foreign taxes) associated with the Section 956 inclusion will be taken into account when determining the application of the anti-abuse rule. Examples have been added illustrating the regulations' scope.

2. Final regulations have been issued regarding the treatment of partnerships for purposes of Section 956. Generally, a CFC partner in a partnership is treated as holding its attributable share of partnership property. A partner's attributable share is determined in accordance with the partner's liquidation value percentage. In certain cases, a partner's attributable share of property is determined solely by reference to the partner's special allocation with respect to the property in the absence of a principal purpose of avoiding Section 956. The accompanying proposed regulations provide exceptions to the rules regarding special allocations for controlled partnerships. The final regulations also provide rules regarding the application of Section 956 when a CFC funds a foreign partnership (or guarantees a borrowing by a foreign partnership) if the foreign partnership makes a distribution to a US partner that is related to the funding CFC.

3. Like the temporary regulations, the final regulations provide that a CFC is not a developer for purposes of the active rents and royalties exception to the foreign personal holding company income rules unless its own employees and officers perform the required functions. Employees may also be located in more than one country in order to meet the active rents and royalties exceptions. In addition, a CFC cannot meet the active rents and royalty exception through cost-sharing arrangements and cost-sharing payments will not be treated as active leasing or licensing expenses for purposes of determining whether an organization is "substantial."

The final regulations generally apply to CFCs whose tax years end on or after the date the regulations are published in the Federal Register. Effective dates may vary, however, for specific provisions in the regulations.

A Tax Alert is forthcoming on the final regulations and proposed regulations and will highlight changes between the final regulations and the 2015 temporary and proposed regulation under Section 956.