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The Treasury Department has released proposed regulations limiting the impact of the repeal of IRC Section 958(b)(4) in determining the controlled foreign corporation (CFC) status of a foreign corporation when applying certain provisions of the Internal Revenue Code (IRC). Before repeal by the Tax Cuts and Jobs Act, IRC Section 958(b)(4) prevented a US subsidiary from being treated as owning stock in a foreign-owned brother-sister subsidiary for purposes of determining whether the brother-sister foreign subsidiary was a CFC.

The proposed regulations do not provide broad relief from the repeal of IRC Section 958(b)(4) (so they would not reenact the repealed statutory limitation through Treasury regulations). Instead, the proposed regulations provide targeted relief by effectively causing select IRC provisions to apply as if IRC Section 958(b)(4) had not been repealed. The proposed regulations notably would:

• Modify IRC Section 267(a)(3) to allow a taxpayer to deduct accrued but unpaid amounts (other than interest) owed to a CFC when (i) the payment is not subject to withholding tax under a treaty, and (ii) the CFC does not have a US person directly or indirectly owning (under IRC Section 958(a)) 10% or more of the stock of the CFC (by vote or value)
• Determine CFC status without regard to the repeal of IRC Section 958(b)(4) for purposes of the IRC Section 1297(e) PFIC asset test
• Determine CFC status without regard to the repeal of IRC Section 958(b)(4) for purposes of the CFC foreign tax credit look-through rules under IRC Section 904(d)(3)
• Provide additional rules, including narrowing the gain recognition agreement (GRA) triggering event exception in Treas. Reg. Section 1.367(a)-8(k)(14) and determining CFC status for purposes of applying IRC Section 332(d)(3) to the liquidation of an applicable holding company

A more detailed Tax Alert on the proposed regulations is forthcoming.