IRS Wants Fairer Cut of Your Foreign Company Profits Pie
Published Date: 8/26/2026
Proposed Rule
Summary
If you own part of a foreign company, the IRS wants to update how your share of certain income or losses is figured. These new rules aim to make things clearer and fairer for U.S. shareholders of controlled foreign corporations. You’ve got until October 26, 2026, to share your thoughts or ask for a public hearing—so don’t miss out!
Analyzed Economic Effects
8 provisions identified: 3 benefits, 2 costs, 3 mixed.
Inclusion When You Own Any Stock
If you are a U.S. shareholder of a foreign company that is a controlled foreign corporation (CFC), you must include your pro rata share of the CFC's subpart F income for a CFC year if you owned stock on any day during that CFC year. The amount is included in your U.S. taxable year that includes the last day you owned the stock during the CFC year (per proposed Sec. 1.951-1(b)(1) and section 951(a)(3)).
Daily Proration for Partial-Year Owners
When ownership of a CFC changes during a CFC year, the proposed rules generally allocate subpart F income, tested income, or tested loss by a daily proration approach — i.e., income is attributed proportionally to the days a shareholder owned the stock during the CFC year. The rules also include special mechanics when a CFC has multiple classes of stock.
Mandatory Closing When CFC Status Changes
If a foreign corporation becomes or ceases to be a CFC (a "status change event"), the proposed regulations require the foreign corporation to close its taxable year as of the end of the day the status change occurs. That closing applies for all purposes of the Code and to all shareholders (proposed Sec. 1.951-1(d)(1)).
Elective Closing After Big Ownership Shifts
Controlling U.S. shareholders may elect to close a CFC's taxable year if specified transfers during the default taxable year cause a significant ownership variance — generally a decrease of more than 50 percentage points in section 958(a) U.S. shareholder ownership. The election, if made, closes the CFC's taxable year as of the day the last specified transfer in the plan occurs and requires a written, binding agreement among specified shareholders (proposed Sec. 1.951-1(d)(2)).
Allocate Foreign Taxes to Short Years
When a CFC's taxable year is closed early (mandatory or elective), foreign income tax that accrues at the end of the foreign taxable year is allocated in part to the U.S. taxable year ending with the closing. The allocation is based on the portion of the foreign taxable income attributable to the period ending with the closing, using a closing-of-the-books method (proposed Sec. 1.951-1(d)(3)); for example, if 50% of foreign taxable income was earned before a June 30 closing, 50% of the foreign tax that accrues on December 31 would be allocated to the U.S. year ending with the closing.
Transition Rule for Certain Dividends (June 28, 2025)
Under the transition rule in section 70354(c)(2) of the OBBBA, certain dividends are not treated as dividends for applying the former section 951(a)(2)(B). A dividend is subject to the transition rule if it is (i) paid or deemed paid on or before June 28, 2025, during a CFC taxable year that includes that date and the U.S. shareholder did not own the stock on or before June 28, 2025, or (ii) paid or deemed paid after June 28, 2025 and before the foreign corporation's first taxable year beginning after December 31, 2025; such a dividend is not treated as a dividend for the former rule if it does not increase the taxable income of a U.S. person (section 70354(c)(2)).
Rules Apply to Foreign-Controlled U.S. Shareholders
The OBBBA-added section 951B generally applies sections 951 through 965 (with specified exceptions) to a foreign-controlled United States shareholder (FCUSS) of a foreign controlled foreign corporation (FCFC) by substituting those terms in place of "United States shareholder" and "controlled foreign corporation." This extends the pro rata share and related rules to FCUSS/FCFC situations.
Partnership-Year Treatment When CFC Year Closes
If a foreign corporation that is a partner in a partnership has its taxable year closed early due to a status change event or an elective closing, the partnership's taxable year generally does not close solely because of that. The foreign corporation generally includes the partnership items arising in the partnership taxable year entirely in the foreign corporation's short U.S. taxable year following the closing.
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