International Tax Law Changes - a Look at the CFC Attribution Rules after the Tax Cuts and Jobs Act
International tax practitioners are working through major changes in international tax laws under the Tax Cuts and Jobs Act. Changes will affect all taxpayers, from multinational corporations to small, midsize business, to individual taxpayers with international assets. This post covers a change in the attribution rules under Section 958 of the Internal Revenue Code that determine controlled foreign corporation ("CFC") status, and the application of the subpart F rules.
The definition of a controlled foreign corporation is found in section 957. Generally, a CFC is a foreign corporation if more than 50 percent of: (1) the total combined voting power of all classes of stock of such corporation entitled to vote; or (2) the total value of the stock of such corporation, is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such foreign corporation.
The definition of a United States Shareholder is found in Section 951(b). It provides, "For purposes of this title, the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation." Therefore, if a United States Person (as defined in Section 7701) holds more than 10% of the shares of a foreign corporation, they will be treated as a U.S. Shareholder for determining CFC status. (Note - the Tax Cuts and Jobs Act also changed the definition of U.S. Shareholder - prior to the TCJA, a U.S. Shareholder looked only to the "vote" rights; it has been expanded with the TCJA to include an ownership).
Attribution rules under Section 958 are applied in determining CFC status. This is where the major change occurs.
Section 958(b)(4) eliminated.
Prior to the Tax Cuts and Jobs act, Section 958(b)(4) eliminated entity level attribution found in Section 318(a)(3). This rule was found in Section 958(b)(4). This rule has been eliminated, such that now, such attribution can create a CFC and subpart F income.
This change is effective for the taxable year of the foreign corporation beginning before January 1, 2018.
International tax attorneys and CPAs across the country will need to review many clients with a fresh lens, and cannot plan to file for the 2017 tax year consistent with what was done in the past. This one change, the elimination of Section 958(b)(4) may create a IRS Form 5471 filing for many taxpayers that did not have a filing requirement before. (Note - after this posting, the IRS dis provide additional guidance as to the filing requirements after the elimination of Section 958(b)(4) in Notice 2018-13).
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