Treasury Issues Section 956 Final Regulations

May 2019

Summary

Recently, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued final regulations that reduce the amount determined under Section 956 with respect to certain domestic corporations. The final regulations affect certain domestic corporations that own (or are treated as owning) stock in foreign corporations.
 

Details

On November 5, 2018, Treasury published proposed regulations (REG-114540-18) under Section 956 in the Federal Register (83 FR 55324). For a summary discussion of the proposed regulations under Section 956 see our November 2018 alert.
 
The final regulations, like the proposed regulations, exclude corporations that are U.S. shareholders (as defined in Section 951(b)) from the application of Section 956 to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations. To achieve this result, the final regulations provide that the amount otherwise determined under Section 956 (the “tentative Section 956 amount”) with respect to a U.S. shareholder for a taxable year of a controlled foreign corporation (CFC) as defined in Section 957 is reduced to the extent that the U.S. shareholder would be allowed a deduction under Section 245A if the U.S. shareholder had received a distribution from the CFC in an amount equal to the tentative Section 956 amount (the “hypothetical distribution”).
 
The final regulations include an ordering rule, treating a hypothetical distribution as attributable first to E&P described in Section 959(c)(2), then to E&P described in Section 959(c)(3), consistent with the allocation of an amount determined under Section 956 pursuant to Section 959(f)(1). This rule, which differs from the general rule for allocation of distributions in Section 959(c) by not treating any amount as attributable to E&P described in Section 959(c)(1), is necessary to reflect that the amount to which the hypothetical distribution applies is in fact a tentative Section 956 amount. This rule is illustrated in a new example in §1.956-1(a)(3)(iii).
 
The final regulations provide that the tentative Section 956 amount with respect to a domestic partnership is reduced to the extent that one or more domestic corporate partners would be entitled to a Section 245A deduction if the partnership received such amount as a distribution, and any remaining amount of the domestic partnership’s inclusion under Sections 951(a)(1)(B) and 956 is allocated to the partners in the same proportion as net income would result to the partners upon a hypothetical distribution (that is, a distribution from the CFC to the domestic partnership).[1] The rules concerning domestic partnerships are illustrated in a new example in §1.956-1(a)(3)(iv).
 
The final regulations also update certain examples in the regulations under Section 956 to reflect that Section 956 may no longer apply in the case of corporate U.S. shareholders.[2]
 
The final regulations apply to taxable years of a CFC beginning on or after July 22, 2019, and to taxable years of a U.S. shareholder in which or with which such taxable years of the CFC end. However, consistent with the reliance allowed for the proposed regulations, taxpayers may apply the final regulations for taxable years of a CFC beginning after December 31, 2017, and for taxable years of a U.S. shareholder in which or with which such taxable years of the CFC end, provided that the taxpayer and U.S. persons that are related (within the meaning of Sections 267 or 707) to the taxpayer consistently apply the regulations with respect to all CFCs in which they are U.S. shareholders for taxable years of the CFCs beginning after December 31, 2017.[3]
 

BDO Insight

Please contact a BDO international tax specialist for assistance in understanding and applying these rules.
 

CONTACT:
 
Joe Calianno
Partner and International Tax Technical Practice Leader
National Tax Office
  Monika Loving
Partner and International Tax Practice Leader
 

 
Brandon Boyle
Principal
  Annie Lee
Partner

 
Chip Morgan
Partner
  Robert Pedersen
Partner

 
Jerry Seade
Principal
  Natallia Shapel
Partner

 
Sean Dokko
Senior Manager
National Tax Office
  Reese Frederickson
Partner
 
 
[1] See §1.956-1(a)(2)(i) and (iii).
[2] See §1.956-1(b)(4) (amended facts common to several examples, to refer to a U.S. citizen, rather than domestic corporation).
[3] See Section 7805(b)(7).