Today (May 17, 2019), the Department of the Treasury and the Internal Revenue Service released proposed regulations (REG-125135-15) under IRC Sections 954 and 958 that would, among other things, affect the computation of "subpart F income" and "global intangible low-taxed income" (GILTI). Generally, the proposed regulations would:

• Modify how the constructive ownership rules of IRC Section 958(b) apply to characterize a person as a "related person" with respect to a CFC under IRC Section 954(d)(3)
• Cause royalties paid by a CFC to be treated the same as rents paid by a CFC for purposes of the "active marketing" exception to "foreign personal holding company income" (FPHCI, a component of subpart F income)

More specifically, the proposed regulations would:

• Render inapplicable the "downward" constructive ownership rules of IRC Section 318(a)(3) and Treas. Reg. Section 1.958-2(d) for purposes of determining related-person status
• Render inapplicable the "option" constructive ownership rules of IRC Section 318(a)(4) and Treas. Reg. Section 1.958-2(d) for purposes of:
• Applying the FPHCI exception in IRC Section 954(c)(6) if a principal purpose of "the use of an option" is to qualify for that exception
• Characterizing a person holding an option as a related person if a principal purpose of "the use of the option" is to treat that person as a related person with respect to "a CFC"
• Treat royalties paid by a CFC to the owner of licensed intangible property, for purposes of the "substantiality test" under the active marketing exception to FPHCI, the same as rents paid by a CFC to the owner of leased property

These proposed regulations would affect directly the treatment of amounts as FPHCI (or not). The proposed regulations would also have consequences under the GILTI regime, due to the relationship of subpart F income and "tested income" under that regime, as well as the incorporation of "related person" status in certain GILTI provisions.

For the most part, the proposed regulations would be effective only prospectively, i.e., as to tax years of CFCs ending on or after the date on which the regulations are published in final form (and the tax years of "United States shareholders" in or with which those years end). Two exceptions, however, are proposed. First, the proposed modification to the option constructive ownership rules as applies to IRC Section 954(c)(6) would be effective for CFC tax years beginning after 2006 (and the corresponding United States shareholder tax years), as first announced in Notice 2007-9. Second, the proposed modifications to the constructive ownership rules for determining related-person status would apply to an amount that a CFC receives or accrues on or after May 17, 2019, if the receipt or accrual is "accelerated" with a principal purpose of avoiding the proposed modifications.