Treasury Finalizes Additional Relief for Stock Attribution Woes

The IRS has recently published final regulations relating to § 958 (b)(4). The IRS has adopted the proposed regulations from October 2, 2019, as final regulations. The final regulation reverts to the pre-enacted Tax Cuts and Jobs Act (TJCA) § 958 (b)(4), with several modifications. This will impact U.S. persons with stock ownership in a foreign corporation. Background As a result of the repeal of §958(b)(4) by the Tax Cuts and Jobs Act (Pub. L. No. 115- 97), stock of a corporation (including a foreign corporation) owned by a foreign person can now be attributed to a U.S. person for various purposes. The repeal caused more U.S. persons to qualify as U.S. shareholders, and more foreign corporations to qualify as controlled foreign corporations (CFCs), for subpart F purposes. The repeal inadvertently also included shareholders (i.e., 10% shareholders), to be subject to subpart F and Global Intangible Low Tax Income (GILTI) due to the downward attribution rules under § 318 (a)(3)(A)(B) and (C) that normally would not. The repeal also did not expound on the effects of other code sections which mentioned CFC status and ownership rules under § 958(b)(4). The following modifications to the code sections clarifies the meaning of CFC as it relates to the downward attribution rules in § 318(a)(3)(A), (B), and (C). Section 672- For purposes of section 672(f) CFC’s has the meaning provided in § 957 and § 318 (a)(3)(A)(B) and (C) is not applicable. Section 332 – For purposes of § 332(d)(3), CFC’s has the meaning provided in section 957 and § 318 (a)(3)(A)(B) and (C) is not applicable as it relates to a US person owning stock which is owned by a person who is not a US person. Section 367-For purposes of § 367, the final regulation states if a US person owns at least five percent of the total voting power and the total value of the outstanding stock of a foreign corporation, then the rule under § 958 (b) applies without applying the downward attribution rules under § 318 (a)(3)(A)(B) and (C). Section 706- The definition of a foreign partner excludes CFC’s within the meaning of § 957(a) in which a U.S. person owns stock which is owned by a foreign partner within the meaning of § 958(a). Section 863- For purposes of § 706, a CFC has the meaning provided in section 957, determined without applying § 318(a)(3)(A), (B), and (C) so as to consider a U.S. person as owning stock which is owned by a person who is not a US person. Section 6049- For purposes of § 6049 a US payor includes a CFC that is a CFC without regard to the downward attribution rules from a foreign person. Section 904- For purposes of § 904, CFC’s are defined under § 957, determined without applying § 318(a)(3)(A), (B), and (C) so as to consider a U.S. person as owning stock which is owned by a person who is not a US person. Section 267- Consistent with the purpose of the general matching rule in § 267(a)(2) and in order for the foreign payee rule in § 267(a)(3)(A) to apply consistently with its application before the repeal of § 958(b)(4), the Treasury Department and the IRS agree that, with respect to all payments (including interest) subject to § 267(a)(3), the CFC payee rule in § 267(a)(3)(B)(i) should not apply if a recipient CFC does not have any section 958(a) U.S. shareholders who are required to include amounts in income with respect to the CFC. However, the Treasury Department and the IRS do not agree that the CFC payee rule should be applied without regard to the repeal of § 958(b)(4), because that could permit the avoidance of the CFC payee rule (and the purposes of the matching rule in general) in foreign-parented structures where a § 958(a) U.S. shareholder is required to include amounts in income with respect to a recipient foreign corporation that is a CFC due solely to the repeal of § 958(b)(4). Accordingly, the exception from the CFC payee rule in proposed regulation §1.267(a)-3(c)(4) is expanded in the final regulations to apply to all amounts payable to a related foreign person that is a CFC that does not have any §958(a) U.S. shareholders.” Conclusion The repealed section § 958 created a reporting requirement for US persons due to the downward attribution rules in § 318(a)(3)(A), (B), and (C). The provision amended the ownership attribution rules of § 958(b) so that certain stock of a foreign corporation owned by a foreign person is attributed to a related person for purposes of determining whether the related us person is a US shareholder. The IRS finalized proposed regulation relating to § 958(b) (4) disregards the application of the downward attribution rules in certain circumstances. Hopefully, this modification can lead to less indirect ownership resulting in CFC status, which can lead to the implication of various tax and reporting requirements. The IRS modified several code sections to clarify the meaning of CFC as summarized above. The 2020 final regulations generally apply on or after October 1, 2019. If there are any questions on how this may impact you, please contact your HBK Advisor.