On June 14, 2019, the Treasury Department and the IRS released temporary regulations (REG-106282-18) under IRC Sections 245A and 954(c)(6). The temporary regulations target transactions considered abusive and contrary to legislative intent and apply retroactively to transactions occurring after December 31, 2017. They deny, in whole or in part, the IRC Section 245A dividends received deduction (Section 245A DRD) and the IRC Section 954(c)(6) exception to foreign personal holding company income (Section 954(c)(6) Exclusion). The regulations would therefore render fully or partially taxable, again with retroactive effect, certain transactions that were previously not subject to tax.

In general, the temporary regulations:

• Deny 50% of the Section 245A DRD for dividends attributable to gain from extraordinary dispositions (Extraordinary Dispositions) that occur in the so-called GILTI gap period (the period between December 31, 2017, and the effective date of IRC Section 951A for fiscal-year controlled foreign corporations (CFCs))
• Deny the Section 245A DRD for certain third-party sale transactions and so-called out-from-under transactions (Extraordinary Reductions), as further described below
• Permit taxpayers to convert dividend income that is fully taxable by reason of the Extraordinary Reduction rule into GILTI or subpart F income, and thereby allow foreign tax credits and the IRC Section 250 deduction, under an election to close a CFC's tax year on the date of a transfer or other reduction
• Deny the Section 954(c)(6) Exclusion for dividends paid by a lower-tier CFC to an upper-tier CFC in the case of Extraordinary Dispositions or Extraordinary Reductions, in each case with respect to a lower-tier CFC

Regarding the Extraordinary Reduction rule, the temporary regulations deny the Section 245A DRD for certain dividends paid in a tax year in which a controlling shareholder transfers more than 10% of its CFC stock or there is a greater than 10% change in the controlling Section 245A shareholder's overall ownership of the CFC. The Section 245A DRD is denied to the extent that subpart F income or tested income would have been included by the shareholder had the transfer or other reduction in ownership not occurred.

A more detailed Tax Alert is forthcoming. We will also be hosting a webcast addressing these topics, along with recently proposed and finalized "GILTI" regulations under IRC Section 951A, on Friday, June 21, at 1pm Eastern Time. An invitation will be sent shortly.