The Internal Revenue Service issued Revenue Procedure 2019-40 and proposed regulations that provide relief to certain U.S. persons that own stock in certain foreign corporations. This is to address the problems created by the “downward attribution” issue where foreign corporations that were not controlled foreign corporations (CFCs) in the past, have now become CFCs because of the Tax Cuts and Jobs Act (TCJA).
Section 958 provides rules for determining direct, indirect, and constructive stock ownership. The repeal of Section 958(b)(4) was part of the TCJA. As a result of this repeal, stock of a foreign corporation owned by a foreign person can be attributed to a U.S. person for purposes of 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 Treasury Department is aware that, in certain circumstances, taxpayers are required to include in gross income amounts under Sections 951 (“subpart F inclusion amounts”) and 951A (“GILTI inclusion amounts”) solely because of the repeal of Section 958(b)(4), even though those taxpayers may have limited ability to determine whether such foreign corporations are CFCs and to obtain the information necessary to accurately determine these amounts.
The Revenue Procedure 2019-40 and proposed regulations will:
- Limit the inquiries required by U.S. persons to determine whether certain foreign corporations are CFCs.
- Allow certain U.S. shareholders to rely on “alternative information” to calculate their Subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not readily available. This can also apply to the Transition Tax (Sec. 965) calculation that may have already been filed. This alternative information will not apply for purposes of foreign tax credits.
- Reduce the amount of information that certain U.S. shareholders of the CFC are required to provide.
- Limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely due to downward attribution from another person (certain Category 1 and 5 filers).
- Provide penalty relief on reporting and underpayment penalties to taxpayers in specific circumstances.
If you own stock in a foreign corporation, contact Moore Stephens Doeren Mayhew for assistance with understanding your reporting requirements and how these relief provisions may benefit your tax situation.