(a) In general

The term “alternative information” means, with respect to a foreign corporation, information described in paragraph (i), (ii), (iii), (iv), (v), (vi), (vii), or (viii) of this section 3.01(a), as applicable, subject to the adjustments described in section 3.01(b) of this revenue procedure. Information described in a paragraph qualifies as alternative information only if information described in any preceding paragraph is not readily available. For example, information described in paragraph (iii) of this section 3.01(a) qualifies as alternative information only if information described in paragraph (i) or (ii) of this section 3.01(a) is not readily available.

(i) Audited separate-entity financial statements of the foreign corporation that are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”).

(ii) Audited separate-entity financial statements of the foreign corporation that are prepared on the basis of international financial reporting standards (“IFRS”).

(iii) Audited separate-entity financial statements of the foreign corporation that are prepared on the basis of the generally accepted accounting principles of the jurisdiction in which the foreign corporation is organized (“local-country GAAP”).

(iv) Unaudited separate-entity financial statements of the foreign corporation that are prepared in accordance with U.S. GAAP.

(v) Unaudited separate-entity financial statements of the foreign corporation that are prepared on the basis of IFRS.

(vi) Unaudited separate-entity financial statements of the foreign corporation that are prepared on the basis of local-country GAAP.

(vii) Separate-entity records used by the foreign corporation for tax reporting.

(viii) Separate-entity records used by the foreign corporation for internal management controls or regulatory or other similar purposes.

(b) Adjustments when the basis of information changes from a prior taxable year

If an amount has been determined by a U.S. shareholder on the basis of information described in a paragraph in section 3.01(a) with respect to a foreign corporation for a taxable year of the foreign corporation, and another amount is subsequently determined by the U.S. shareholder on the basis of information described in a different paragraph in section 3.01(a) or on the basis of information satisfying the requirements of §1.952-2(a), (b), and (c)(2) and section 964 and the regulations thereunder with respect to a different taxable year of the foreign corporation, then as a condition of the IRS accepting the use of alternative information under this revenue procedure, the U.S. shareholder will use reasonable efforts to make any adjustments necessary in the subsequent taxable year to ensure that the change in type of information does not cause any material items to be duplicated or not included in any taxable year of the foreign corporation.

The term “constructive U.S. shareholder” means, with respect to a foreign corporation, a U.S. shareholder with respect to the foreign corporation that is not a section 958(a) U.S. shareholder with respect to the foreign corporation.

The term “foreign-controlled CFC” means a foreign corporation that is a CFC but that would not be a CFC, if the determination were made without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a U.S. person as owning stock which is owned by a foreign person.

The term “readily available” means, with respect to a person, information for a foreign corporation that, as of the due date (taking into account extensions, if any, or any additional time that would have been granted if the person had made an extension request) of the person’s return:

(a) Is publicly available;

(b) In the case of a direct or indirect investment in the foreign corporation that is completed on or before October 1, 2019, or subject to a binding contract as of October 1, 2019, or an acquisition of stock of the foreign corporation from a person that is not the foreign corporation or a related person with respect to the foreign corporation, the person has the legal or contractual right to obtain and is able to obtain using reasonable efforts; or

(c) In the case of a direct or indirect investment in, or acquisition of stock of, the foreign corporation that is not described in paragraph (b) of this section 3.04, the foreign corporation is not prohibited from providing to the person under the laws of the jurisdiction(s) to which the foreign corporation is subject and the person is able to obtain using reasonable efforts. For purposes of this paragraph (c), reasonable efforts include a good faith attempt to obtain the right to receive relevant information as part of the acquisition or investment agreement(s).

The term “related constructive U.S. shareholder” means, with respect to a foreign corporation, a constructive U.S. shareholder that is a related person with respect to the foreign corporation.

The term “related person” means, with respect to a person, another person described in section 954(d)(3), substituting the first-mentioned person for “controlled foreign corporation” each place it appears.

The term “related section 958(a) U.S. shareholder” means, with respect to a foreign corporation, a section 958(a) U.S. shareholder with respect to the foreign corporation, if such section 958(a) U.S. shareholder is a related person with respect to the foreign corporation.

The term “section 957 ownership requirements” means, with respect to a foreign corporation and any given day of a taxable year of the foreign corporation, stock ownership described in section 957 that would cause the foreign corporation to be a CFC on such day.

The term “section 958(a) U.S. shareholder” means, with respect to a foreign corporation, a U.S. shareholder with respect to the foreign corporation that owns (within the meaning of section 958(a)) stock of the foreign corporation.

The terms “separate-entity financial statements” and “separate-entity records” mean, with respect to a foreign corporation, financial statements or records, as applicable, reflecting the balance sheet or operations solely of the foreign corporation. Notwithstanding the prior sentence, financial statements or records of a foreign corporation qualify as separate-entity financial statements or separate-entity records, as applicable, if:

(a) In cases in which a foreign corporation owns an equity interest in an entity that is a partnership or any other entity (whether domestic or foreign) other than a corporation to the extent that the income or deductions of the entity are included in the income of one or more direct or indirect owners or beneficiaries of the entity (such an entity, a “pass-through entity”), including through other pass-through entities, the information from the foreign corporation’s financial statements or records is adjusted to take into account the foreign corporation’s proportionate share of the balance sheet and operations of the pass-through entity (based on the separate-entity financial statements or separate-entity records of the entity, determined as if such entity were a foreign corporation) to the extent these items are not already reflected in the foreign corporation’s financial statements or records, as applicable; and

(b) In cases in which a foreign corporation directly or indirectly owns an interest in an entity that is not a pass-through entity whose items are included in the information on the foreign corporation’s financial statements or records (such as an equity interest in a reverse hybrid entity (as defined in §1.909-2(b)(1)(iv))), the information from the foreign corporation’s financial statements or records is adjusted so that the information solely reflects the balance sheet and operations of the foreign corporation, subject to paragraph (a) of this section 3.10.

The term “unrelated constructive U.S. shareholder” means, with respect to a foreign corporation, a constructive U.S. shareholder with respect to the foreign corporation that is not a related constructive U.S. shareholder with respect to the foreign corporation.

The term “unrelated section 958(a) U.S. shareholder” means, with respect to a foreign corporation, a section 958(a) U.S. shareholder with respect to the foreign corporation that is not a related section 958(a) U.S. shareholder with respect to the foreign corporation.

The term “U.S.-controlled CFC” means a foreign corporation that is a CFC other than a foreign-controlled CFC.

In certain circumstances, as a result of the repeal of section 958(b)(4), a U.S. shareholder with respect to a foreign corporation may not be able to determine that the foreign corporation is a CFC without knowledge regarding the investments of unrelated persons. In such a case, the Treasury Department and the IRS recognize that it may not be possible for the U.S. shareholder to obtain information necessary to determine whether the foreign corporation is a CFC.

(a) In general

For the reasons discussed in section 4.01 of this revenue procedure, the IRS will accept a U.S. person’s determination that a foreign corporation does not meet the section 957 ownership requirements and, therefore, that the foreign corporation is not a CFC with respect to the U.S. person if the conditions described in section 4.02(b) of this revenue procedure are satisfied. For the avoidance of doubt, if a U.S. person directly or indirectly owns (within the meaning of section 958(a)) stock in a foreign corporation, and a foreign person that is not a related person with respect to the U.S. person also directly or indirectly owns (within the meaning of section 958(a)) stock in the foreign corporation, the U.S. person’s failure to inquire of the foreign person whether the foreign person owns directly or indirectly (determined under the principles of section 958(a)(2)) or constructively owns (determined under the principles of section 958(b)) stock of, or an interest in, a domestic entity will not preclude reliance on the safe harbor described in this section 4.02. The safe harbor set forth in section 4.02 does not apply to a foreign corporation that is a U.S.-controlled CFC.

(b) Conditions

(i) The U.S. person does not have actual knowledge, statements received, and/or reliable publicly available information sufficient for the U.S. person to determine that the section 957 ownership requirements are met. For purposes of applying this condition, actual knowledge, statements received, and/or reliable publicly available information as of a given date shall be treated as true for all subsequent dates, unless subsequent information rebuts the original information.

(ii) If the U.S. person directly owns stock of, or an interest in, a foreign entity (“top-tier entity”), the U.S. person inquires of the top-tier entity whether it meets the section 957 ownership requirements, whether, how, and to what extent such top-tier entity directly or indirectly owns (within the meaning of section 958(a)) stock of one or more foreign corporations, and whether, how, and to what extent such top-tier entity owns directly or indirectly (determined under the principles of section 958(a)(2)) stock of, or an interest in, one or more domestic entities.

In order to determine a subpart F inclusion amount or GILTI inclusion amount of a U.S. shareholder with respect to a CFC, the U.S. shareholder needs to determine the gross and taxable income, as well as the qualified business asset investment (within the meaning of section 951A(d)) and specified interest expense (as defined in §1.951A-1(c)(3)(iii)), of the CFC. In addition, in order to determine whether the E&P limitation in section 952(c)(1)(A) on subpart F income applies, the U.S. shareholder needs to determine the E&P of the CFC. Under §1.952-2(a) and (b), the gross and taxable income of a foreign corporation are generally determined by treating the foreign corporation as a domestic corporation and by applying the principles of sections 61 and 63 and the regulations thereunder. Under section 964 and the regulations thereunder, the E&P of a foreign corporation are determined according to rules substantially similar to those applicable to domestic corporations. Under §§1.952-2(c)(2) and 1.964-1(a)(1), the determinations of income and E&P of a foreign corporation are made by first making adjustments to the foreign corporation’s books of account to conform with U.S. GAAP, and then making further adjustments to conform such statements to U.S. tax accounting standards.

However, the Treasury Department and the IRS recognize that certain U.S. shareholders may be unable to obtain information necessary for the U.S. shareholder to calculate a subpart F inclusion amount or GILTI inclusion amount in the case of a foreign corporation that is a foreign-controlled CFC or report amounts on Form 5471 consistent with the requirements in §1.952-2 and section 964 and the regulations thereunder. Accordingly, the Treasury Department and the IRS believe that it is reasonable for taxpayers to choose to use alternative information for determining a subpart F inclusion amount and GILTI inclusion amount or related recordkeeping or reporting on a Form 5471 with respect to a foreign-controlled CFC in the circumstances described in this section 5. The IRS will accept the use of alternative information by a taxpayer in the circumstances described in section 5.02 of this revenue procedure. However, nothing in this revenue procedure affects the application of the requirements for determining the foreign income taxes paid or accrued by a foreign-controlled CFC for purposes of applying section 960 (relating to deemed paid foreign income taxes). Accordingly, a taxpayer that uses alternative information must determine if amounts paid or accrued are “foreign income taxes,” as defined under §1.960-1(b)(5) and satisfy the evidentiary and other requirements of §1.905-2.

In the case of a foreign-controlled CFC with respect to which there is no related section 958(a) U.S. shareholder, if information satisfying the requirements of §1.952-2(a), (b), and (c)(2) and section 964 and the regulations thereunder is not readily available to an unrelated section 958(a) U.S. shareholder with respect to the foreign-controlled CFC, a subpart F inclusion amount or a GILTI inclusion amount or an amount in a record required to be maintained under section 964(c), §1.964-3, or §1.964-4 may be determined by the unrelated section 958(a) U.S. shareholder on the basis of alternative information (without adjustments other than those described in sections 3.01(b) and 3.10 of this revenue procedure) with respect to the foreign-controlled CFC. However, the preceding sentence does not apply for purposes of determining section 965 amounts (as defined in section 6.01 of this revenue procedure). See section 6 of this revenue procedure for a safe harbor for determining section 965 amounts.

In the case of a foreign-controlled CFC with respect to which there is no related section 958(a) U.S. shareholder, the Treasury Department and the IRS intend to revise the instructions for Form 5471 to provide that if information satisfying the requirements of §1.952-2(a), (b), and (c)(2) and section 964 and the regulations thereunder is not readily available to an unrelated section 958(a) U.S. shareholder or an unrelated constructive U.S. shareholder with respect to the foreign-controlled CFC, an amount reported on a Form 5471 may be determined by the unrelated section 958(a) U.S. shareholder or the unrelated constructive U.S. shareholder, as applicable, on the basis of alternative information (without adjustments other than those described in sections 3.01(b) and 3.10 of this revenue procedure) with respect to the foreign-controlled CFC.

The Treasury Department and the IRS recognize that certain U.S. shareholders may have been unable to obtain information necessary for the U.S. shareholder to calculate an amount included under section 951 by reason of section 965 or a deduction under section 965(c) (each a “section 965 amount”) in the case of certain SFCs consistent with the requirements of section 964 and the regulations thereunder and thus may have used alternative information. Accordingly, the Treasury Department and the IRS believe that it is reasonable in such circumstances for such taxpayers to use an approach consistent with the approach outlined in section 5 of this revenue procedure for purposes of the determination of section 965 amounts. Thus, the IRS will accept the use of alternative information by a taxpayer in the circumstances described in section 6.02 of this revenue procedure. However, nothing in this revenue procedure affects the application of the requirements for determining the foreign income taxes paid or accrued by an SFC for purposes of applying sections 902 and 960 (as in effect on December 21, 2017) for taxable years of SFCs that begin before January 1, 2019. Accordingly, a taxpayer that uses alternative information must determine if amounts paid or accrued are “foreign income taxes,” as provided under sections 902 and 960 (as in effect on December 21, 2017) and applicable regulations, and satisfy the evidentiary and other requirements of §1.905-2, and the extent to which a credit is disallowed for such amounts (see, for example, section 901(k)(1), (l), and (m)).

In the case of an SFC, other than either a foreign-controlled CFC with respect to which there is a related section 958(a) U.S. shareholder or a U.S.-controlled CFC, if information satisfying the requirements of §1.952-2(a), (b), and (c)(2) and section 964 and the regulations thereunder is not readily available to an unrelated section 958(a) U.S. shareholder with respect to the SFC, a section 965 amount may be determined by the section 958(a) U.S. shareholder on the basis of alternative information (without adjustments other than those described in sections 3.01(b) and 3.10 of this revenue procedure) with respect to the SFC, provided the section 958(a) U.S. shareholder reports such amount on a return both due and filed before October 1, 2019, or a return both due and filed after October 1, 2019.

In the case of an SFC, other than either a foreign-controlled CFC with respect to which there is a related section 958(a) U.S. shareholder or a U.S.-controlled CFC, the Treasury Department and the IRS intend to revise the instructions for Form 5471 to provide that if information satisfying the requirements of section 964 and the regulations thereunder is not readily available to an unrelated section 958(a) U.S. shareholder or an unrelated constructive U.S. shareholder with respect to the SFC, an amount reported on a Form 5471 may be determined by the unrelated section 958(a) U.S. shareholder or the unrelated constructive U.S. shareholder, as applicable, on the basis of alternative information (without adjustments other than those described in sections 3.01(b) and 3.10 of this revenue procedure) with respect to the SFC.

Under section 6038(b) and (c), penalties can be imposed if any person fails to timely furnish information required under section 6038(a)(1), which information is required to be reported on Form 5471. Under section 6038(c)(4)(B), for purposes of determining such penalties, the time for furnishing such information is treated as not earlier than the last day on which reasonable cause existed for failure to furnish such information. Under section 6662, penalties can be imposed on any portion of an underpayment (as defined in section 6664(a)) of tax required to be shown on a return that is attributable to one of the items listed in section 6662(b), which include negligence or disregard of rules or regulations and a substantial understatement of income tax. Under section 6664(c)(1), penalties will generally not be imposed under section 6662 with respect to any portion of an underpayment if it is shown that there was reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.

Taking into account that the IRS will accept taxpayers’ positions based on sections 4.02, 5.02, and 6.02 of this revenue procedure and the availability of reasonable cause relief, penalties under sections 6038 and 6662 will not be applied to the extent such penalties would be attributable to:

(a) A U.S. person determining that a foreign corporation does not meet the section 957 ownership requirements consistent with section 4.02 of this revenue procedure,

(b) A U.S. person determining a subpart F inclusion amount or GILTI inclusion amount, an amount in a record required to be maintained under section 964(c), §1.964-3, or §1.964-4, or an amount reported on a Form 5471 on the basis of alternative information consistent with section 5.02 of this revenue procedure, or

(c) A U.S. person determining a section 965 amount on the basis of alternative information consistent with section 6.02 of this revenue procedure.

Pursuant to section 6038(a)(4), the IRS may require any U.S. person treated as a U.S. shareholder of a CFC to file an information return on Form 5471 with respect to its ownership in such CFC. In section 5.02 of Notice 2018-13, 2018-6 I.R.B. 341, the Treasury Department and the IRS announced that the IRS intended to amend the instructions for Form 5471 to provide an exception from Category 5 filing for a U.S. person that is a U.S. shareholder with respect to a CFC if no U.S. shareholder (including such U.S. person) owns, within the meaning of section 958(a), stock in such CFC, and the foreign corporation is a CFC solely because such U.S. person is considered to own the stock of the CFC owned by a foreign person under section 318(a)(3). Section 6 of Notice 2018-13 and section 7 of Notice 2018-26, 2018-16 I.R.B. 480, provided that taxpayers may rely on this exception with respect to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent year of the foreign corporation, and for the taxable years of a U.S. shareholder in which or with which these taxable years of the foreign corporation end. Accordingly, the instructions for Form 5471 (rev. December 2018) provide that a Category 1 or 5 filer does not have to file a Form 5471 if no U.S. shareholder (including the filer) owns, within the meaning of section 958(a), stock in the foreign corporation, and the foreign corporation is a specified foreign corporation or CFC solely because one or more U.S. persons is considered to own the stock of the foreign corporation owned by a foreign person under section 318(a)(3).

However, the Treasury Department and the IRS understand that, even as modified, the Form 5471 filing requirements may result in a significant undertaking for certain U.S. shareholders with limited access to information with respect to a foreign-controlled CFC. Accordingly, the Treasury Department and the IRS intend to further limit the Form 5471 filing requirements, as described in sections 8.02, 8.03, and 8.04 of this revenue procedure.

The IRS intends to revise the instructions for Form 5471 to provide that a Category 5 filer is generally only required to file the identifying information on page 1 of Form 5471 above Schedule A, as well as Schedule I, Schedule I-1, and Schedule P, with respect to a foreign-controlled CFC if the Category 5 filer is an unrelated section 958(a) U.S. shareholder with respect to the foreign-controlled CFC. If, however, the Category 5 filer claims under section 960 to be deemed to have paid foreign income taxes of the foreign-controlled CFC for the Category 5 filer’s taxable year, Schedule E and Schedule E-1 are also required to be filed. Therefore, a Category 5 filer that is an unrelated section 958(a) U.S. shareholder with respect to a foreign-controlled CFC will no longer have to file Part II of Schedule B, Schedule G, Schedule H, or Schedule J with respect to the foreign-controlled CFC.

The IRS intends to revise the instructions for Form 5471 to provide that a Category 5 filer is generally only required to file the identifying information on page 1 of Form 5471 above Schedule A, as well as Part II of Schedule B, Schedule E, Schedule G, and Schedule I-1, with respect to a foreign-controlled CFC if the Category 5 filer is a related constructive U.S. shareholder with respect to the foreign-controlled CFC. Therefore, a Category 5 filer that is a related constructive U.S. shareholder with respect to a foreign-controlled CFC will no longer have to file Schedule E-1, Schedule H, Schedule I, Schedule J, or Schedule P with respect to the foreign-controlled CFC.

The IRS intends to revise the instructions for Form 5471 to provide that a Category 5 filer is not required to file a Form 5471 with respect to a foreign-controlled CFC if it is an unrelated constructive U.S. shareholder with respect to the foreign-controlled CFC.

Section 958 provides rules for determining direct, indirect, and constructive stock ownership. Under section 958(a)(1), stock is considered owned by a person if it is owned directly or is owned indirectly through certain foreign entities under section 958(a)(2). Under section 958(b), section 318 applies, with certain modifications, to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b) (“U.S. shareholder”) of a foreign corporation, to treat a person as a related person within the meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a U.S. shareholder of a controlled foreign corporation (“CFC”) for purposes of section 956(c)(2), or to treat a foreign corporation as a CFC under section 957.

Section 318 provides rules that attribute the ownership of stock to certain family members, between certain entities and their owners, and to holders of options to acquire stock. Section 318(a)(1) provides rules attributing stock ownership among members of a family. Section 318(a)(2) provides rules attributing stock ownership from partnerships, estates, trusts, and corporations to partners, beneficiaries, owners, and shareholders (so-called “upward attribution”). Section 318(a)(3) generally attributes stock owned by a person to a partnership, estate, trust, or corporation in which the person has an interest (so-called “downward attribution”). In particular, section 318(a)(3)(A) provides that stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate is considered as owned by the partnership or estate. This provision applies to all partners and beneficiaries without regard to the size of their interest in the partnership or estate. Section 318(a)(3)(B) similarly provides, subject to certain exceptions, that stock owned, directly or indirectly, by or for a beneficiary of a trust (or a person who is considered an owner of a trust) is considered owned by the trust. Section 318(a)(3)(C) provides that stock in one corporation owned, directly or indirectly, by or for a shareholder in a second corporation is considered owned by the second corporation if 50 percent or more in value of the stock in the second corporation is owned, directly or indirectly, by such shareholder.

As in effect before repeal, section 958(b)(4) provided that subparagraphs (A), (B), and (C) of section 318(a)(3) (providing for downward attribution) were not to be applied so as to consider a United States person as owning stock owned by a person who is not a United States person (a “foreign person”). Effective for the last taxable year of foreign corporations beginning before January 1, 2018, and each subsequent year of the foreign corporations, and for the taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporations end, section 958(b)(4) was repealed by section 14213 of the Tax Cuts and Jobs Act, Pub. L. 115-97 (2017) (the “Act”). As a result of this repeal, stock of a foreign corporation owned by a foreign person can be attributed to a United States person under section 318(a)(3) for purposes of determining whether a United States person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. In other words, as a result of the repeal of section 958(b)(4), section 958(b) now provides for downward attribution from a foreign person to a United States person in circumstances in which section 958(b), before the Act, did not so provide. As a result, United States 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 legislative history to the Act indicates that the repeal of section 958(b)(4) was intended “to render ineffective certain transactions that are used to [sic] as a means of avoiding the subpart F provisions.” See H.R. Rep. No. 115-466, at 633 (2017) (Conf. Rep.). It further provides:

One such transaction involves effectuating “de-control” of a foreign subsidiary, by taking advantage of the section 958(b)(4) rule that effectively turns off the constructive stock ownership rules of 318(a)(3) when to do otherwise would result in a U.S. person being treated as owning stock owned by a foreign person. Such a transaction converts former CFCs to non-CFCs, despite continuous ownership by U.S. shareholders.

Id. at 633-34.

IRS Revenue Procedures, Revenue Rulings, notices, and other guidance cited in this document are published in the Internal Revenue Bulletin and are available from the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402, or by visiting the IRS website at http://www.irs.gov.

Before the proposed regulations are adopted as final regulations, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the “ADDRESSES” heading. The Treasury Department and the IRS request comments on all aspects of the proposed regulations. The Treasury Department and the IRS also request comments on whether any other rules should be modified in light of the repeal of section 958(b)(4).

All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person that timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place for the public hearing will be published in the Federal Register.

The principal authors of the proposed regulations are Karen J. Cate and Jorge M. Oben of the Office of Associate Chief Counsel (International). However, other personnel from the Treasury Department and the IRS participated in the development of the proposed regulations.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by revising the entry for § 1.267(a)-3 and adding entries for §§ 1.332-8 and 1.1297-1 in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.267(a)-3 also issued under 26 U.S.C. 267(a)(3)(A) and (a)(3)(B)(ii).

* * * * *

Section 1.332-8 also issued under 26 U.S.C. 332(d)(4).

* * * * *

Section 1.1297-1 also issued under 26 U.S.C. 1298(g).

* * * * *

Par. 2. Section 1.267(a)-3 is amended by:

1. Removing the language “or (a)(3)” from paragraph (c)(2).

2. Revising paragraph (c)(4).

3. In paragraph (d), revising the second sentence and adding five sentences at the end of the paragraph.

The revisions and addition read as follows:

§1.267(a)-3 Deduction of amounts owed to related foreign persons.

* * * * *

(c) * * *

(4) Certain amounts owed to certain controlled foreign corporations. An amount (other than interest) that is income of a related foreign person with respect to which the related foreign person is exempt from United States taxation on the amount owed pursuant to a treaty obligation of the United States (such as under an article relating to the taxation of business profits) is exempt from the application of section 267(a)(3)(B)(i) if the related foreign person is a controlled foreign corporation that does not have any United States shareholders (as defined in section 951(b)) that own (within the meaning of section 958(a)) stock of the controlled foreign corporation.

* * * * *

(d) * * * Except as otherwise provided in this paragraph (d), the regulations in this section issued under section 267 apply to all other deductible amounts that are incurred after July 31, 1989, but do not apply to amounts that are incurred pursuant to a contract that was binding on September 29, 1983, and at all times thereafter (unless the contract was renegotiated, extended, renewed, or revised after that date). Paragraph (c)(2) of this section applies to payments accrued on or after October 22, 2004. For payments accrued before October 22, 2004, see §1.267(a)-3(c)(2), as contained in 26 CFR part 1, revised as of April 1, 2004. Paragraph (c)(4) of this section applies to payments accrued on or after October 1, 2019. For payments accrued before October 1, 2019 a taxpayer may apply paragraph (c)(4) of this section for payments accrued during the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such paragraph with respect to all foreign corporations. For payments accrued before October 22, 2004, see §1.267(a)-3(c)(4), as contained in 26 CFR part 1, revised as of April 1, 2004.

Par. 3. Section 1.332-8 is added to read as follows:

§1.332-8 Recognition of gain on liquidation of certain holding companies.

(a) Definition of controlled foreign corporation. For purposes of section 332(d)(3), a controlled foreign corporation has the meaning provided in section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

(b) Applicability date. This section applies to distributions in complete liquidation occurring on or after October 1, 2019, and to distributions in complete liquidation occurring before October 1, 2019, that result from an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 1, 2019. For distributions in complete liquidation occurring before October 1, 2019, other than distributions in complete liquidation occurring before October 1, 2019, that result from an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 1, 2019, a taxpayer may apply this section to distributions in complete liquidation occurring during the last taxable year of a distributee foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply this section with respect to all foreign corporations.

Par. 4. Section 1.367(a)-8 is amended by:

 

4. In each newly redesignated paragraph listed in the first column, removing the language in the second column and adding in its place the language in the third column:

 

5. In paragraph (q)(2):

a. Removing the language “at least 5% (applying the attribution rules of section 318, as modified by section 958(b))” each place that it appears and adding “at least 5% (determined as provided in paragraph (k)(14)(ii) of this section)” in its place.

b. Designating Examples 1 through 25 as paragraphs (q)(2)(i) through (xxv), respectively.

6. In newly redesignated paragraphs (q)(2)(i) through (xxv), redesignating the paragraphs in the first column as the paragraphs in the second column:

 

7. In each newly redesignated paragraph listed in the first column, removing the language in the second column and adding in its place the language in the third column:

 

8. Amend each paragraph listed in the first column, by removing the language in the second column and adding in its place the language in the third column:

 

9. Revising the heading of paragraph (r).

10. Adding two sentences at the end of paragraph (r)(1)(i).

The revision and addition read as follows:

§1.367(a)-8 Gain recognition agreement requirements.

* * * * *

(k) * * *

(14) * * *

(ii) * * * If, as a result of the disposition or other event, a foreign corporation acquires the transferred stock or securities or, as applicable, substantially all the assets of the transferred corporation, the condition of this paragraph (k)(14)(ii) is satisfied only if the U.S. transferor owns at least five percent (applying the attribution rules of section 318, as modified by section 958(b), without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider the U.S. transferor as owning stock which is owned by a person who is not a United States person) of the total voting power and the total value of the outstanding stock of such foreign corporation.

* * * * *

(r) Applicability dates. (1) * * *

(i) * * * Paragraph (k)(14)(ii) of this section applies to transfers occurring on or after October 1, 2019, and to transfers occurring before October 1, 2019, that result from an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 1, 2019. For transfers occurring before October 1, 2019, other than transfers occurring before October 1, 2019, that result from an entity classification election made under §301.7701-3 of this chapter that is filed on or after October 1, 2019, a taxpayer may apply paragraph (k)(14)(ii) of this section to transfers occurring during the last taxable year of a transferee foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such paragraph with respect to all foreign corporations.

* * * * *

Par. 5. Section 1.672(f)-2 is amended by revising paragraphs (a) and (e) to read as follows:

§1.672(f)-2 Certain foreign corporations.

(a) Application of general rule in this section. Subject to the provisions of paragraph (b) of this section, if the owner of any portion of a trust upon application of the grantor trust rules without regard to section 672(f) is a controlled foreign corporation or a passive foreign investment company (as defined in section 1297), the corporation will be treated as a domestic corporation for purposes of applying the rules of §1.672(f)-1. For purposes of this section, the only controlled foreign corporations taken into account are those that are controlled foreign corporations within the meaning provided in section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(e) Applicability dates. Except as provided in this paragraph (e), the rules of this section apply to taxable years of shareholders of controlled foreign corporations and passive foreign investment companies beginning after August 10, 1999, and taxable years of controlled foreign corporations and passive foreign investment companies ending with or within such taxable years of the shareholders. The provisions in paragraph (a) of this section relating to the controlled foreign corporations taken into account for purposes of this section apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Par. 6. Section 1.706-1 is amended by:

The revisions and addition read as follows:

§1.706-1 Taxable years of partner and partnership.

* * * * *

(b) * * *

(6) * * *

(ii) Definition of foreign partner. For purposes of this paragraph (b)(6), a foreign partner is any partner that is not a United States person (as defined in section 7701(a)(30)), except that a partner that is a controlled foreign corporation (within the meaning of section 957(a)) in which a United States shareholder (as defined in section 951(b)) owns (within the meaning of section 958(a)) stock is not treated as a foreign partner.

* * * * *

(v) Applicability dates. (A) * * * The provisions of this paragraph (b)(6) (other than paragraph (b)(6)(iii) of this section and paragraph (b)(6)(ii) of this section to the extent described in the next sentence) apply to partnership taxable years, other than those of an existing partnership, that begin on or after July 23, 2002. The provisions in paragraph (b)(6)(ii) of this section relating to controlled foreign corporations apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations. * * *

* * * * *

Par. 7. Section 1.863-8 is amended by:

The revisions and addition read as follows:

§1.863-8 Source of income derived from space and ocean activity under section 863(d).

* * * * *

(b) * * *

(2) * * *

(ii) * * * Space and ocean income derived by a controlled foreign corporation (CFC) is income from sources within the United States. * * * For purposes of this section, a controlled foreign corporation has the meaning provided in section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(h) Applicability dates. Except as provided in this paragraph (h), this section applies to taxable years beginning on or after December 27, 2006. The provisions in paragraph (b)(2)(ii) of this section relating to the meaning of CFC apply to taxable years of foreign corporations ending on or after October 1, 2019. For taxable years of foreign corporations ending before October 1, 2019, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Par. 8. Section 1.863-9 is amended by revising paragraphs (b)(2)(ii) and (l) to read as follows:

§1.863-9 Source of income derived from communications activity under section 863(a), (d), and (e).

* * * * *

(b) * * *

(2) * * *

(ii) International communications income derived by a controlled foreign corporation. International communications income derived by a controlled foreign corporation (CFC) is one-half from sources within the United States and one-half from sources without the United States. For purposes of this section, a controlled foreign corporation has the meaning provided in section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(l) Applicability dates. Except as otherwise provided in this paragraph (l), this section applies to taxable years beginning on or after December 27, 2006. The provisions in paragraph (b)(2)(ii) of this section relating to the meaning of CFC apply to taxable years of foreign corporations ending on or after October 1, 2019. For taxable years of foreign corporations ending before October 1, 2019, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Par. 9. Section 1.904-5, as proposed to be amended at 83 FR 63200 (December 7, 2018), is further amended by:

The revisions read as follows:

§1.904-5 Look-through rules as applied to controlled foreign corporations and other entities.

(a) * * *

(4) * * *

(i) The term controlled foreign corporation has the meaning given such term by section 957 (taking into account the special rule for certain captive insurance companies contained in section 953(c)), determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(vi) The term United States shareholder has the meaning given such term by section 951(b) (taking into account the special rule for certain captive insurance companies contained in section 953(c)), determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person, except that for purposes of this section, a United States shareholder includes any member of the controlled group of the United States shareholder. * * *

* * * * *

(o) Applicability dates. Except as otherwise provided in this paragraph (o), this section applies to taxable years that both begin after December 31, 2017, and end on or after December 4, 2018. Paragraphs (a)(4)(i) and (vi) of this section apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States persons ending on or after October 1, 2019. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States persons ending before October 1, 2019, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Par. 10. Section 1.958-2 is amended by:

1. Removing and reserving paragraph (d)(2).

2. In paragraph (g), designating Examples 1 through 6 as paragraphs (g)(1) through (6), respectively.

3. In newly designated paragraphs (g)(1) and (2), removing the language “paragraph (c)(1)(iii) and (2) of this section” and adding “paragraphs (c)(1)(iii) and (c)(2) of this section” in its place.

4. Revising newly designated paragraph (g)(4).

5. Adding paragraph (h).

6. Removing the parenthetical authority citation at the end of the section.

The revisions and addition read as follows:

§1.958-2 Constructive ownership of stock.

* * * * *

(g) * * *

(4) Example 4. Foreign corporation U owns 100 percent of the one class of stock in domestic corporation V and also 100 percent of the one class of stock in foreign corporation W. Because more than 50 percent in value of the stock of V Corporation is owned by its sole shareholder, U Corporation, V Corporation is considered under paragraph (d)(1)(iii) of this section as owning the stock owned by U Corporation in W Corporation, and accordingly is a United States shareholder of W Corporation.

* * * * *

(h) Applicability date. Paragraphs (d)(2) and (g)(4) of this section apply to taxable years of foreign corporations ending on or after October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end. For taxable years of foreign corporations ending before October 1, 2019, and taxable years of United States shareholders in which or with which such taxable years of foreign corporations end, a taxpayer may apply such provisions to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and to taxable years of United States shareholders in which or with which such taxable years of the foreign corporation end, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such provisions with respect to all foreign corporations.

Par. 11. Section 1.1297-1, as proposed to be added at 84 FR 33120 (July 11, 2019), is amended by revising paragraphs (d)(1)(iii)(A) and (g)(1) to read as follows:

§1.1297-1 Definition of passive foreign investment company.

* * * * *

(d) * * *

(1) * * *

(A) Controlled foreign corporation. For purposes of section 1297(e)(2)(A), the term controlled foreign corporation has the meaning provided in section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(g) * * *

(1) Paragraph (d)(1)(iii)(A) of this section. Paragraph (d)(1)(iii)(A) of this section applies to taxable years of shareholders ending on or after October 1, 2019. For taxable years of shareholders ending before October 1, 2019, a shareholder may apply paragraph (d)(1)(iii)(A) of this section to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the shareholder and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such paragraph with respect to all foreign corporations.

* * * * *

Par. 12. Section 1.6049-5 is amended by revising paragraphs (c)(5)(i)(C) and (g) to read as follows:

§1.6049-5 Interest and original issue discount subject to reporting after December 31, 1982.

* * * * *

(c) * * *

(5) * * *

(i) * * *

(C) A controlled foreign corporation within the meaning of section 957, determined without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

* * * * *

(g) Applicability dates. Except as otherwise provided in this paragraph (g), this section applies to payments made on or after January 6, 2017. (For payments made after June 30, 2014, and before January 6, 2017, see this section as in effect and contained in 26 CFR part 1, as revised April 1, 2016. For payments made after December 31, 2000, and before July 1, 2014, see this section as in effect and contained in 26 CFR part 1, as revised April 1, 2013.) Paragraph (c)(5)(i)(C) of this section applies to payments made on or after October 1, 2019. For payments made before October 1, 2019, a taxpayer may apply paragraph (c)(5)(i)(C) of this section for payments during the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, provided that the taxpayer and United States persons that are related (within the meaning of section 267 or 707) to the taxpayer consistently apply such paragraph with respect to all foreign corporations.

Kirsten Wielobob,

Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on October 1, 2019, 8:45 a.m., and published in the issue of the Federal Register for October 2, 2019, 84 F.R. 52398)