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Proposed Treasury Regulations Would Disallow Technique to Reduce Subpart F and GILTI Inclusions

On December 9, 2022, Treasury released proposed regulations that would prevent consolidated groups from engaging in certain related party transactions to reduce the group’s Subpart F and GILTI inclusions. Specifically, Treasury has focused on consolidated groups taking the position that the transfer of controlled foreign corporation (“CFC”) stock within the group could reduce the group’s Subpart F and GILTI inclusions.

Currently, U.S. Shareholders of a CFC on the last day it so qualifies in a given tax year are required to include in gross income their “pro rata share” of the foreign corporation’s Subpart F income and GILTI. The U.S. Shareholder’s pro rata share is initially calculated as the amount the U.S. Shareholder would receive in a pro rata distribution of the CFC’s Subpart F income (or GILTI), prorated for the portion of the year that the foreign corporation qualified as a CFC. This initial amount is then reduced by the lesser of (i) other shareholders’ distributions received with respect to the U.S. Shareholder’s CFC stock and (ii) the CFC’s Subpart F income (or GILTI) allocable to the period the U.S. Shareholder did not own such CFC stock.

Thus, a member of a consolidated group holding CFC stock for part of the year and receiving a tax-free distribution of previously taxed earnings and profits under Section 959(b) from the CFC might transfer the CFC stock to another member of the consolidated group and then claim that the group’s Subpart F and GILTI inclusions should be reduced due to the Section 959(b) distribution. The proposed regulations would prevent this result by treating all members of a consolidated group as a single taxpayer for purposes of the above-described reduction when calculating the consolidated group’s Subpart F and GILTI inclusions.

Key Contacts

Adam Blakemore
T. +44 (0) 20 7170 8697

Linda Z. Swartz
T. +1 212 504 6062

Jon Brose
T. +1 212 504 6376

Andrew Carlon
T. +1 212 504 6378

Mark P. Howe
T. +1 202 862 2236

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