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October 4, 2019
Report on recent US international tax developments – 4 October 2019
The United States (US) Government on 1 October released proposed regulations that would limit the impact of the repeal of Internal Revenue Code1 Section 958(b)(4) in determining the controlled foreign corporation (CFC) status of a foreign corporation when applying certain provisions of the Code. Before its repeal by the Tax Cuts and Jobs Act, Section 958(b)(4) prevented a US subsidiary from being treated as owning stock in a foreign-owned brother-sister subsidiary for purposes of determining whether the brother-sister foreign subsidiary was a CFC.
The proposed regulations do not provide broad relief from the repeal of Section 958(b)(4), but instead offer targeted relief by effectively causing select Code provisions to apply as if Section 958(b)(4) had not been repealed. The proposed regulations notably would:
The proposed regulations generally would apply on or after 1 October 2019. For taxable years before taxable years covered by the regulations, taxpayers generally may apply the rules in the final regulations to the last taxable year of a foreign corporation beginning before 1 January 2018, if certain conditions are met.
On the same day, the Internal Revenue Service (IRS) also issued Rev. Proc. 2019-40 related to the repeal of Section 958(b)(4). According to the IRS, the revenue procedure “limits the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations” and “allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements” for certain CFCs if more detailed tax information is unavailable.
The revenue procedure, which provides a series of safe harbors, would apply generally as of the last taxable year of a foreign corporation beginning before 1 January 2018.
1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP, International Tax and Transaction Services, Washington, DC