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September 21, 2020

BREAKING TAX NEWS | Treasury releases final and proposed regulations on determining CFC status for certain provisions following repeal of IRC Section 958(b)(4)

The Treasury Department has released final and 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. 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 final regulations generally follow the proposed regulations issued in October 2019 (see Breaking Tax News 2019–9019 for a summary of the proposed regulations). In one notable change, the final regulations expand an exception so that no deductions are deferred under IRC Section 267(a)(3)(B)(i) on payments to a related CFC unless the CFC has an inclusion US shareholder.

Importantly, the proposed regulations would make payments ineligible for look-through under IRC Section 954(c)(6) if paid by a CFC that is only a CFC as a result of the repeal of IRC Section 958(b)(4). The denial of IRC Section 954(c)(6) look-through treatment is proposed to apply to payments of dividends, interest, rents and royalties made during tax years of the foreign corporation ending on or after September 21, 2020.

The proposed regulations also would apply certain stock ownership thresholds for satisfying nonrecognition treatment on the outbound transfers of stock or securities of a domestic corporation under Treas. Reg. Section 1.367(a)-3(c) without regard to the repeal of IRC Section 958(b)(4).

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