On August 13, 2026, Treasury and the IRS proposed regulations (REG-103844-26) under IRC Section 987 that would permit controlled foreign corporations (CFCs) to elect out of rules requiring them to compute or recognize IRC Section 987 gain or loss from remittances or the termination of their IRC Section 987 qualified business units (QBUs). The income determination and translation rules under IRC Section 987(1) and (2) would continue to apply. Taxpayers generally may rely on the proposed regulations for tax years beginning after December 31, 2024, provided applicable consistency requirements are satisfied.

The proposed regulations are generally expected to reduce the compliance burden associated with the 2024 final IRC Section 987 regulations for many multinational groups. Taxpayers considering the election, however, should carefully evaluate the treatment of existing IRC Section 987 gain and loss positions (including any corresponding impact to the foreign tax credit (FTC)), the consequences of future inbound restructurings, interactions with other tax return positions and elections, and potential issues arising in future M&A transactions involving CFCs with IRC Section 987 QBUs.

Background

The 2024 final IRC Section 987 regulations generally require CFCs to compute and recognize IRC Section 987 gain or loss from QBUs whose functional currency differs from that of the CFC owner. These regulations provide rules that address both the determination and translation of non-functional currency earnings under IRC Section 987(1) and (2), and any gain or loss arising from a QBU remittance, termination, or certain other transactions under IRC Section 987(3). Following issuance of those regulations, commenters recommended that IRC Section 987(3) should not apply to CFCs. In response, Notice 2026-17 announced that Treasury and the IRS intended to provide an election under which CFCs generally would not compute or recognize IRC Section 987 gain or loss in respect of remittances or terminations. The proposed regulations would implement that election and provide related transition, consistency and anti-abuse rules.

Proposed regulations

Proposed Treas. Reg. Section 1.987-15 would introduce a new CFC exemption election under which a CFC generally would neither compute nor recognize IRC Section 987 gain or loss from its IRC Section 987 QBUs in a tax year in which the election applies, including on remittances or QBU terminations. The election would not, however, exempt CFCs from IRC Section 987 entirely. The income determination and translation rules under IRC Section 987(1) and (2) would continue to apply, including for purposes of determining taxable income and earnings and profits.

The proposed regulations include special timing rules that would permit taxpayers to make the election for tax years beginning in 2025 on either an original return or an amended return filed by October 15, 2027. Otherwise, for tax years beginning after 2024 and ending before 2027, the election generally could be made on an original, timely filed (including extensions) return for such tax year. For tax years ending in 2027, the election generally must be made on or before October 15, 2027. For tax years ending after 2027, the election generally would have to be made on or before the beginning of the tax year to which it would apply. The election generally would be subject to consistency requirements applicable to commonly controlled CFCs and certain affiliated domestic groups.

Taxpayers making the election generally would be required to compute pre-election IRC Section 987 gain or loss and recognize that amount ratably over 120 months. However, the proposed regulations would provide a small-QBU exemption under which a QBU generally would be deemed to have zero pre-election IRC Section 987 gain or loss if the average assets of the QBU and the exempt CFC's other same-country QBUs over the preceding three years were less than $50 million. This exception may significantly reduce transition-related compliance burdens because taxpayers would not be required to compute pre-election IRC Section 987 gain or loss for those QBUs.

The proposed regulations also would extend the CFC exemption election to certain partnership structures. In general, the election would apply when an exempt CFC owns an IRC Section 987 QBU through a partnership and would also apply to certain "exempt partnerships" that are at least 80% owned, by capital or profits interests, by exempt CFCs that are members of the same controlled group.

The proposed regulations would include an important limitation on the election for certain inbound nonrecognition transactions. Treasury and the IRS expressed concern that, absent special rules, an exempt CFC could import exchange-rate-related asset basis into the United States without corresponding gain recognition. Accordingly, if the assets of an exempt CFC were to be acquired by a domestic corporation in certain inbound liquidations or reorganizations, the exempt CFC generally would recognize IRC Section 987 gain immediately before the transaction to the extent of its "[IRC] Section 987 asset basis." No corresponding rule would allow recognition of IRC Section 987 loss in an inbound transaction.

The proposed regulations also would provide simplified rules for determining an exempt CFC's IRC Section 987 asset basis, as well as a de minimis exception for inbound transactions involving less than $25 million of aggregate inside asset basis.

The proposed regulations generally would apply to tax years ending on or after the date final regulations are published in the Federal Register, but taxpayers may rely on the proposed regulations for tax years beginning after December 31, 2024, subject to applicable consistency requirements.

Implications

The proposed regulations are likely to provide welcome relief for many taxpayers by allowing them to opt out of computing and recognizing IRC Section 987 gain or loss on routine remittances and other ordinary-course transactions involving CFC-owned QBUs. As a practical matter, the CFC exemption election may become the default approach for many taxpayers that otherwise would be required to apply the 2024 final regulations to CFC-owned QBUs.

Nevertheless, taxpayers should carefully consider the timing of the election. Although the proposed regulations would permit taxpayers to make the election on an amended return for tax years beginning in 2025, the CFC exemption election could affect other elections, accounting method decisions and return positions that taxpayers may not be able to revisit on an amended return. Accordingly, taxpayers should consider modeling the CFC exemption election before filing their original 2025 returns.

Taxpayers contemplating inbound liquidations or reorganizations of exempt CFCs should pay particular attention to the proposed inbound transaction rules. Although the election generally would eliminate ongoing IRC Section 987 gain or loss computations, certain inbound transactions could result in immediate recognition of potentially significant IRC Section 987 gain. Depending on the facts, the resulting income could have significant collateral consequences, including effects on FTC limitation calculations, Subpart F income, net CFC tested income and other tax attributes.

The proposed regulations also raise important considerations in the M&A context. Treasury and the IRS continue to study how the consistency rules should apply when one group has made the CFC exemption election and another has not. Accordingly, taxpayers considering acquisitions involving CFCs with IRC Section 987 QBUs may wish to conduct due diligence regarding the target group's election status, significant pre-election or pretransition IRC Section 987 attributes, and potential consistency-rule implications.