Treasury Proposes Regulations for Certain Ownership Attribution Rules and the Active Rental Exception to Subpart F Income

May 2019

Summary

Recently, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued proposed regulations that provide rules regarding the attribution of ownership of stock or other interests for purposes of determining whether a person is a “related person” with respect to a controlled foreign corporation (CFC) under Section 954(d)(3). In addition, the proposed regulations provide rules for determining whether a CFC is considered to derive rents in the active conduct of a trade or business for purposes of computing foreign personal holding company income (the active rental exception to Subpart F income). The proposed regulations affect U.S. persons with direct or indirect ownership interests in certain foreign corporations.
 

Details 

The proposed regulations revise the existing regulations under Section 954(d)(3), to provide specific guidance on the application of principles similar to the constructive ownership rules in Section 958(b). In particular, the proposed regulations revise §1.954-1(f), to provide that the rules of Section 318(a)(3) and §1.958-2(d) do not apply for purposes of Section 954(d)(3) and §1.954-1(f). Section 1.958-2 is also proposed to be revised to cross-reference the limitations on its applicability in §1.954-1(f).
 
However, the revision to §1.954-1(f) does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under the other rules that remain applicable for purposes of Section 954(d)(3) and §1.954-1(f). In addition, the proposed regulations provide that Section 318(a)(4) does not apply to treat a person that has an option to acquire stock or an equity interest, or an interest similar to such an option, as owning the stock or equity interest for purposes of the Section 954(d) related person definition if a principal purpose for the use of the option or similar interest is to cause a person to be treated as a related person with respect to a CFC.
 
Regarding the active rental exception to Subpart F income, the proposed regulations revise §1.954-2(c)(2)(iii)(B) and §1.954-2(c)(2)(iv)(A) to apply generally to amounts paid or incurred, including both rents and royalties, by the lessor CFC for the right to use the property (or a component thereof) that generated the rental income.
 
For dates of applicability see the proposed regulations.
 

BDO Insight

The proposed changes to the ownership attribution rules should prevent certain entities from being treated as related for certain purposes. The proposed changes to the active rental exception to Subpart F income may make it more difficult for some CFCs to meet the substantiality safe harbor. Please contact a BDO international tax specialist for assistance in understanding and applying the proposed regulations.
 

CONTACT:
 
Joe Calianno
Partner and International Tax Technical Practice Leader
 
  Monika Loving
Partner and International Tax Practice Leader
 
Brandon Boyle
Principal
 
  Reese Frederickson
Partner
 
Annie Lee
Partner
 
  Chip Morgan
Partner
 
Robert Pedersen
Partner
 
  Jerry Seade
Principal
 
Natallia Shapel
Partner
 
  Sean Dokko
Senior Manager