The Tax Cuts and Jobs Act (TCJA) created significant changes for both taxpayers and practitioners. One of the most disruptive and wide-ranging changes to taxpayers of TCJA was the repeal of Internal Revenue Code (IRC) Section 958(b)(4), effective as of January 1, 2018.<\/span><\/p>\n
A foreign corporation is treated as a controlled foreign corporation (CFC) to the extent that more than 50% of the total combined voting power or value of the stock of the corporation is owned directly, indirectly, or constructively by \u201cUnited States shareholders\u201d on any day during the taxable year of the foreign corporation. In this context, a \u201cUnited States shareholder\u201d is a US person who owns 10% or more of the total combined voting power or value of the foreign corporation.<\/span><\/p>\n
Generally, Section 958(b) requires taxpayers to apply rules of IRC Section 318(a) \u2013 i.e., so-called \u201cdownward attribution\u201d rules. Under these rules, stock owned by a person (e.g., an individual, a corporation) is deemed to be owned by certain partnerships, estates, trusts and corporations in which that person has a certain interest.<\/span><\/p>\n
Before TCJA, Section 958(b)(4) disallowed \u201cdownward attribution\u201d of stock held by a foreign person to a US person. Following the repeal of Section 958(b)(4), a domestic corporation may be deemed to constructively own stock of a foreign corporation owned by another foreign corporation, to the extent that certain specified relationships exist between all three. This, in turn, may cause the foreign corporation to be treated as a CFC for US tax purposes even though it does not have any direct or indirect United States shareholders.<\/span><\/p>\n
Section 958(b)(4) has been repealed by Congress to target transactions that would allow United States shareholders to potentially avoid Subpart F and GILTI inclusions. GILTI, or \u201cglobal intangible low-taxed income<\/a>,\u201d<\/span>\u00a0<\/span>is, roughly, taxable income derived from CFCs by a United States shareholder. However, this repeal and the attendant US tax ramifications (summarized below) have created problems for many US taxpayers, who are invested in foreign structures. As a result, US taxpayers that were not previously treated as United States shareholders may be treated as United States shareholders. Further, foreign corporations that were not previously treated as CFCs may now be treated as CFCs. This is especially problematic for large private equity funds that have investors who own at least 10% of the funds.<\/span><\/p>\n
Many taxpayers are hoping for Congress to pass a technical correction bill to correct the unintended consequences of the repeal of Section 958(b)(4). However, until this correction happens, some planning opportunities may help mitigate the unintended consequences due to the repeal of Section 958(b)(4). Planning opportunities that may be considered in this regard are<\/span><\/p>\n
If you would like to discuss the impact of these rules for you or opportunities to mitigate the impact, please contact us<\/a>.<\/span><\/p>\n
Article written by Inna Ganz<\/p>\n","protected":false},"excerpt":{"rendered":"