The Tax Times: IRS Grants Relief for Certain Foreign Stock Ownership!

Wednesday, October 2, 2019

IRS Grants Relief for Certain Foreign Stock Ownership!

New regulations from the Internal Revenue Service provide relief to some U.S. taxpayers who own stock in certain foreign corporations. Rev. Proc. 2019-40 and the proposed regulations limit the inquiries required by U.S. taxpayers to determine whether certain foreign businesses are controlled foreign corporations.

The Revenue Procedure limits the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations (“CFCs”). The Revenue Procedure also allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. It also provides penalty relief to taxpayers in the specified circumstances.

Finally, the Revenue Procedure announces that the IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of the CFC are required to provide. It will also limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.

The proposed regulations provide additional relief to taxpayers affected by the repeal of section 958(b)(4). These regulations also propose modifications to existing regulations that are intended to ensure, in certain appropriate circumstances, that the operation of certain rules is consistent with their application before the repeal of section 958(b)(4). The repeal of section 958(b)(4) was part of the Tax Cuts and Jobs Act.

Section 958 provided the rules for determining stock ownership of CFCs. These rules included direct, indirect, and constructive ownership. In looking at the constructive ownership rules, Section 318 is applied with certain modifications. Prior to the enactment of the TCJA, Section 958(b)(4) prevented stock owned by a non-US person from being considered to be owned, via attribution, by a US person.

The repeal of Section 958(b)(4) has created a situation in which there’s no longer a limitation on the downward attribution of stock ownership. Instead, under the revised attribution rules, a foreign subsidiary company that shares a foreign parent with a US company is now classified as a CFC. A CFC is defined as a foreign corporation that’s more than 50% owned by vote or value by a US shareholder.

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