Upcoming Regulations for Basis in Controlled Foreign Corporations
Published on by Lauren Huster in International Business, Tax Services
The IRS says they’ll propose new regulations for the treatment of controlled foreign corporations (CFCs) – with the intent of preventing double taxation on a CFC’s previously taxed earnings and profits to U.S. corporations in certain restructuring scenarios. The announcement was made on December 28, 2023, in IRS Notice 2024-16.
The backstory
The Tax Cuts and Jobs Act (TCJA) changed the taxation of CFCs. Before the TCJA, U.S. corporations had the opportunity to defer tax on CFCs until distributions were made. After the TCJA, CFCs were taxed annually under the Global Intangible Low-Taxes Income (GILTI) regime.
Per IRC Sec 961(c), a U.S. corporation’s basis in a CFC is the stock of the CFC and the amount required to be included in its gross income under GILTI.
IRC Sec 959(a) allows U.S. corporations to exclude from gross income any amounts distributed from a CFC that have already been taxed as previously taxed earnings and profits to avoid double taxation.
While this income is excluded, a U.S. taxpayer’s basis in a CFC is reduced by these amounts. If the amount distributed is greater than the basis of the CFC, then this is taxable to the U.S. taxpayer.
How the proposed changes work
Currently, an acquiring U.S. corporation’s adjusted basis in the stock of an acquired CFC does not reflect the basis adjustments described above; therefore, the notice intends to address the double taxation issues of certain inbound nonrecognition transactions such as a liquidation described in IRC Sec 332 or an asset reorganization described in IRC Sec 368(a)(1).
There are restrictions to which transactions would be covered in this notice, but the IRS is currently welcoming comments. The notice does state that a taxpayer may rely on the guidance provided in the Notice as long as the rules are followed in their entirety and in a consistent manner.
Talk to us
You may also be interested in welcome relief for taxpayers on foreign tax credit regulations, how Permanent Establishment (PE) works, or more detail on foreign tax penalties.
If you have any questions on the impact of the proposed regulations on your international business activity, or questions about international tax and how to optimize your tax position, the Barnes Dennig team of top international tax pros is here to help. Contact us today.
