United States

Final regulations change CFC attribution rules

TAX ALERT  | 

The IRS finalized regulations (TD 9883) affecting US persons with direct or indirect ownership interests in certain foreign corporations on Nov. 18, 2019. The proposed regulations (REG-125135-15) that were published on May 20, 2019 were adopted without change. The regulations generally limit the attribution of stock ownership or other interests (i.e., the so-called downward attribution rules) for purposes of determining whether a person is related to a controlled foreign corporation (CFC) under section 954(d)(3). As a result, stock owned by a partner, beneficiary, or shareholder will not be treated as owned by a partnership, trust, or corporation. This rule is applicable for tax years of CFCs ending after the date that the final regulations were published. The regulations also provide guidance on determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income (FPHCI).  The new rules could make it more difficult for companies to qualify for certain exceptions to Subpart F such as the exception for active rents.

Taxpayers with foreign corporations in their group should consult with their tax advisors to assess the impact of these regulations.

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