U.S. persons who own stock in controlled foreign corporations (CFCs) may be able to benefit from safe harbors for determining CFC status and resulting income inclusions under Rev. Proc. 2019-40.
The IRS also issued proposed regulations (REG-104223-18) concerning ownership attribution for determining the status of corporations as CFCs and their U.S. shareholders.
The guidance was prompted by the repeal of Sec. 958(b)(4) by the law known as the Tax Cuts and Jobs Act, P.L. 115-97. Before its repeal, in determining constructive ownership of stock, Sec. 958(b)(4) provided that the rules in Sec. 318(a)(3)(A), (B), or (C) (the downward attribution rules) were not to be applied so as to consider a U.S. person as owning stock owned by a person that is not a U.S. person. The downward attribution rules attribute ownership of stock directly or indirectly for or by a partner, beneficiary, or controlling stockholder to the respective partnership, estate, trust, or corporation and thence to other partners, beneficiaries, or shareholders.
Due to Sec. 958(b)(4)'s repeal, stock of a foreign corporation owned by a foreign person can be attributed to a U.S. person under the downward attribution rules in determining whether the U.S. person or another U.S. person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. As a result, U.S. persons that were not previously treated as U.S. shareholders may be treated as U.S. shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs. The Code change is effective for the last tax year of foreign corporations beginning before Jan. 1, 2018, and subsequently.
Ownership of stock in CFCs caused by the repeal of Sec. 958(b)(4), in turn, may require taxpayers to include in gross income amounts under Secs. 951 (Subpart F) and 951A (global intangible low-taxed income, or GILTI). In issuing the relief, the IRS stated it recognized that taxpayers so affected might not be able to obtain information to accurately determine these income amounts or whether foreign corporations in which they now are considered to own stock are in fact CFCs.
Therefore, for foreign corporations that are not U.S.-controlled CFCs, the IRS will accept a U.S. person's determination that a corporation is not a CFC under Sec. 957(a) if the following conditions are satisfied:
- The U.S. person has no actual knowledge, statements received, and/or reliable publicly available information sufficient to determine that the Sec. 957 ownership requirements are met.
- If the U.S. person directly owns stock of, or an interest in, a foreign entity (a top-tier entity), the U.S. person inquires of the top-tier entity whether it meets the Sec. 957 ownership requirements; whether, how, and to what extent the top-tier entity directly or indirectly owns stock of one or more foreign corporations; and whether, how, and to what extent the top-tier entity owns, directly or indirectly, stock of, or an interest in, one or more domestic entities.
In addition, Rev. Proc. 2019-40 provides safe harbors for using "alternative information" to determine amounts necessary for calculating Subpart F and/or GILTI inclusions, such as the CFC's gross and taxable income, qualified business asset investment under Sec. 951A(d), specified interest expense, and earnings and profits.
The revenue procedure also provides relief from penalties under Secs. 6038 and 6662 for failure to report certain information required on Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, upon application of the safe harbors consistent with the revenue procedure and taxpayers' acting in good faith with reasonable cause.
Finally, the revenue procedure notes that the IRS intends to further limit Form 5471 filing requirements, in addition to exceptions it announced earlier in Notice 2018-13.
The revenue procedure applies with respect to the last tax year of a foreign corporation beginning before Jan. 1, 2018, and subsequently, and with respect to the tax years of U.S. shareholders in which or with which these tax years of foreign corporations end.
The proposed regulations would amend a number of existing regulations (including under Secs. 267, 332, and 1297) to ensure, in appropriate circumstances, that the operation of various rules is consistent with their application before the repeal of Sec. 958(b)(4).
- Rev. Proc. 2019-40, REG-104223-18
— By Paul Bonner, a JofA senior editor.