IRS Narrows Look-Through Rule for Related CFCs

On May 17, the IRS and Treasury issued proposed regulations that would narrow a taxpayer-favorable "look-though" rule and, as a result, could increase a 10% U.S. shareholder's tax liability in respect of any controlled foreign corporation (CFC). 

Section 954 of the tax code generally defines certain types of income that, when earned by a CFC, are taxable on a current basis to certain 10% U.S. shareholders of that CFC, regardless of whether or when the income is actually distributed. Section 958 generally defines 10% U.S. shareholders.

Currently, taxed income under Section 954 generally includes dividends, interest, royalties, rents and annuities. However, under a “look-through” exception, dividends, interest, rents, or royalties received by one CFC from a related CFC are not currently taxed to 10% U.S. shareholders to the extent attributable to certain non-U.S. business income.

The definition of “related CFC” for this purpose is broad. The proposed regulations would narrow the definition (and thus narrow the look-through rule) so that, for example, two CFCs would no longer be treated as related solely because their parents are partners in the same partnership, or solely because their parents each own stock and options in another corporation that would total more than 50% if exercised.

The proposed regulations generally would apply prospectively. However, the proposed regulations apply immediately to any 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 modifications. 

 

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