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April 21, 2022

US | Wyden-Portman proposal would disallow foreign tax credits and other US tax benefits connected with operations in Russia or Belarus

Executive summary

On 7 April 2022, United States (US) Senate Finance Committee Chairman Ron Wyden and Senate Finance Committee Member Rob Portman released a discussion draft of proposed legislation that would disallow foreign tax credits for taxes paid to Russia or Belarus, and would also disallow certain other US tax benefits (Proposal). In particular, the Proposal would amend Internal Revenue Code1 Section 901(j) to deny foreign tax credits for taxes paid or accrued to Russia or Belarus. The Proposal would also eliminate other US tax benefits for persons within the Proposal's scope, including tax treaty benefits, benefits under Section 892, the trading safe harbor under Section 864(b) and the shipping exemption under Section 883.

Detailed discussion

Denial of foreign tax credit

Denial of foreign tax credits and deductions for income tax paid or accrued to Russia or Belarus

Section 1 of the Proposal would amend Section 901(j) to add a new Section 901(j)(2)(C), which would disallow any income taxes paid or accrued to the Russia Federation or the Republic of Belarus, beginning on the date that is 30 days after the date of the Proposal's enactment and ending on the date upon which normal trade relations resume under the Suspending Normal Trade Relations with Russia and Belarus Act (Applicable Period). The Proposal would further disallow any deductions for income taxes paid or accrued to Russia or Belarus.

Subpart F income treatment under Section 952(a)(5)

Section 952(a)(5) treats the income derived by a controlled foreign corporation (CFC) from a country listed in Section 901(j) as subpart F income. Thus, under Section 1 of the Proposal, income derived by a CFC from Russia and Belarus during the Applicable Period would be treated as subpart F income, and any income earned in those countries would be subject to the 21% rate.

Transition rules for taxpayers exiting Russia or Belarus

The Proposal provides a safe harbor rule for taxpayers if they have exited or are exiting from doing business in Russia or Belarus. To qualify for the safe harbor rule, the gross receipts derived from those countries (determined generally under the rules in Sections 448(c)(2) and 448(c)(3)) should be reduced by: (i) 85% or more in 2022; and (ii) 95% or more in 2023 and going forward, compared to the taxpayer's gross receipts in 2021. The Proposal would authorize the Treasury to issue guidance to determine whether a taxpayer has exited from Russia or Belarus.

Denial of certain US tax benefits

Section 2 of the Proposal would deny US tax benefits to certain identified persons connected with Russia or Belarus, or persons subject to sanctions in relation to the invasion of Ukraine. The denial of benefits would extend to:

  • The benefits available for foreign governments and international organizations under Section 892

  • Tax treaty benefits, notwithstanding Section 894

  • The exemption from withholding taxes for interest received from certain portfolio debt investments under Sections 871(h) and 881(c)

  • The "trading safe harbor" described under Section 864(b)(2)

  • The exemption from taxes on shipping and aircraft income under Section 883

  • The qualified foreign pension fund (QFPF) exemption from the Foreign Investment in Real Property Tax Act (FIRPTA) tax under Section 897(l)

Persons affected

The denial of the US tax benefits noted previously would apply to three categories of persons: (i) any person that has been sanctioned by the US in relation to the invasion of Ukraine that began on 24 February 2022, (ii) the government of any foreign country to which new Section 901(j)(2)(C) would apply, namely the governments of Russia and Belarus; and (iii) any other person identified by the Secretary of the Treasury as a person meriting the loss of these tax benefits.

Regarding persons to be identified by the Secretary, the Proposal refers to a person that is (a) participating (or has participated) in the invasion of Ukraine, and (b) an entity organized in Russia or Belarus (excluding controlled foreign corporations as defined in Section 957), including an executive or officer of that entity. In addition, other persons to be identified by the Secretary would include "a person that controls, is controlled by, is related to, or is an affiliate of, any other person to which this section applies." None of the terms referenced in this section are further defined, so it is unclear what percentage ownership (or other factors) would result in a person being "related to" or "an affiliate of" another person for this purpose.

The Proposal would automatically deny US benefits (as described previously) if a person is controlled by a Russian or Belarussian entity that the Secretary has identified, regardless of whether the Secretary explicitly identifies that person. In this case, the person must notify the Secretary and its withholding agents that it is subject to the loss of US tax benefits.

Applicable period

In general, the denial of US tax benefits would begin 30 days after the later of: (i) the enactment of the Proposal; or (ii) the date when a person is included within one of the categories of persons identified as within the Proposal's scope.

For portfolio interest, the denial of US tax benefits would begin on the later of (i) 180 days after the Proposal is enacted (60 days for obligations issued on or after the date of enactment); or (ii) 60 days after the person is included within one of the categories of persons identified as within the Proposal's scope.

Suspension of information exchange

Tax information exchange with Russia and Belarus under a treaty or intergovernmental agreement would be suspended during the period for which Section 901(j)(2)(C) applies.


According to Senators Wyden and Portman, this Proposal is aimed at denying US tax benefits to persons that are "choos[ing] to keep doing business in Russia." The Proposal would achieve its aims by disallowing foreign tax credits and deductions, and various other US tax benefits, to these persons.

The Proposal grants the Secretary of the Treasury considerable authority in the implementation of the rules. For example, the Proposal does not provide any indication of the criteria to be used in determining whether the loss of US tax benefits is merited, leaving it to the Secretary to identify such persons.

Further guidance would also be required in order to determine those persons impacted by the Proposal, as the draft language does not define some key terms used, including "control," "affiliate" and "related to." Depending on how these terms are defined, the scope of persons affected by the denial of the listed US tax benefits could be extensive.

Taxpayers should consider how the Proposal might impact their structures and whether to engage with the legislative process, considering the uncertainty over whether and how quickly the Proposal might progress and how it may be modified.


For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (United States), International Tax and Transaction Services



  1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.

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