Today (October 31, 2018), the U.S. Treasury Department and the Internal Revenue Service released proposed regulations under Section 956 of the Internal Revenue Code (REG-114540-18). Although Section 956 was not amended in connection with the law commonly known as the Tax Cuts and Jobs Act (TCJA), Treasury and the IRS indicated that the proposed regulations are necessary based on other provisions (notably, Section 245A) enacted as part of the TCJA.

In general, a "United States shareholder" (whether or not a corporation) of a "controlled foreign corporation" (CFC) must include in gross income an amount determined under Section 956. The "Section 956 amount" generally corresponds to the CFC's investment in "United States property" — an amount that thereby is deemed to have been repatriated. In connection with the inclusion, a corporate US shareholder is deemed to have paid (and generally may take as a credit against its US federal income tax liability) certain income taxes actually paid by the CFC.

New Section 245A allows a corporation to deduct, upon receipt, an eligible dividend from a qualifying foreign corporation. The deduction can equal, and therefore completely offset, an eligible dividend. Section 245A is associated with a "territorial system" of taxation, under which corporations are not subject to tax on certain foreign earnings. In general, a corporation receiving a dividend eligible for a deduction under Section 245A is not deemed to have paid any income taxes actually paid by the distributing foreign corporation.

The proposed regulations — which would apply to tax years of CFCs beginning on or after the date final regulations are published — would reduce a corporate US shareholder's inclusion under Section 956 with respect to a CFC to the extent that the United States shareholder would have been allowed a deduction under Section 245A for a hypothetical dividend distributed by the CFC. One important consequence is that a corporate US shareholder would not be able affirmatively to cause a CFC to invest in US property so as to be treated as having paid certain income taxes paid by the CFC.

Treasury and the IRS indicated that the reduction under the proposed regulations is "necessary to maintain symmetry between the taxation of actual [dividend] repatriations [for which a corporate shareholder might be allowed a deduction under Section 245A] and the taxation of effective repatriations [under Section 956]." Special rules would address indirectly-owned CFCs. The proposed regulations would not affect non-corporate US shareholders.

A Tax Alert is forthcoming that will analyze the proposed regulations in detail.