Treasury Issues Proposed Regulations on CFC Pro Rata Share Rules Under the OBBBA

Treasury and the IRS have published proposed regulations under sections 951 and 951A of the Internal Revenue Code addressing how a U.S. shareholder determines its pro rata share of a controlled foreign corporation’s (CFC’s) subpart F income, tested income, or tested loss following changes enacted by the One Big Beautiful Bill Act (OBBBA) (for prior coverage, see BDO USA’s Table of Key Tax Provisions on the OBBBA). The proposed regulations — published in the Federal Register on September 11, 2026 — replace the former last-day ownership framework for subpart F and tested items with rules that generally allocate income or loss based on stock ownership during the CFC year. They also provide mandatory and elective CFC year-closing rules, transition guidance for certain dividends, and related reporting requirements. 

The rules are expected to be particularly important in acquisitions, dispositions, restructurings, stock issuances, redemptions, and other transactions that change ownership of a CFC during its taxable year. They may affect transaction modeling, Form 5471 reporting, foreign tax credit timing, purchase agreement terms, tax-sharing provisions, and economic true-up arrangements.

Revised Pro Rata Share Framework

For taxable years of foreign corporations beginning after December 31, 2025, a U.S. shareholder may be required to include subpart F income if it owns stock of a CFC on any day during the CFC year. Ownership on the last day the corporation is a CFC is no longer required for a section 951(a)(1)(A) inclusion. The inclusion is taken into account in the U.S. shareholder’s taxable year that includes the last day on which the shareholder owns stock in the CFC during that CFC year.

Daily Proration

The proposed regulations generally allocate a CFC’s annual subpart F income, tested income, or tested loss among U.S. shareholders using a daily proration approach. For a CFC with one class of stock and a constant number of outstanding shares, a shareholder’s pro rata share is determined by multiplying the CFC-level amount by the shareholder’s percentage ownership and by the portion of the CFC year during which the shareholder owned the shares, was a U.S. shareholder, and the foreign corporation was a CFC. If a shareholder owns different blocks of shares for different periods during the year, the calculation is performed separately for each “CFC year block.”

This approach may allocate annual income or loss ratably across ownership periods, even if the CFC’s actual income or loss was economically earned before or after a transfer. Buyers, sellers, and other shareholders therefore may see tax allocations that differ from their economic expectations. Accordingly, purchase agreements and tax-sharing provisions may need to address those differences between tax allocations under the proposed rules and the parties’ economic arrangements.

Mandatory and Elective CFC Year Closings

The proposed regulations would require a foreign corporation to close its taxable year for all U.S. federal income tax purposes when a “status change event” occurs. A status change event generally occurs when the foreign corporation becomes or ceases to be a CFC. The taxable year closes at the end of the day on which the status change occurs. Special rules apply in determining CFC status for this purpose where stock is owned through a domestic partnership or by reason of an option.

The proposed regulations also would permit the controlling section 958(a) U.S. shareholders to elect to close a CFC’s taxable year when a “significant ownership variance” occurs and the year does not otherwise close. A significant ownership variance generally occurs when specified transfers under the same plan during the default CFC year reduce section 958(a) U.S. shareholder ownership by more than 50 percentage points. Transfers to related U.S. persons generally do not count to the extent the related person’s increased ownership offsets the transferor’s decrease, and certain F reorganizations are disregarded.

Election Procedures

The elective closing is subject to detailed procedural requirements. In general, the relevant U.S. shareholders must enter into a written, binding agreement before the election statement is filed. Each controlling section 958(a) U.S. shareholder must file an Elective Section 951 Year-Closing Statement with a timely filed original federal income tax return, including extensions. The statement identifies the CFC and relevant shareholders, describes the significant ownership variance and closing date, and confirms the binding agreement. A consistency rule requires the election to be made for all CFCs experiencing significant ownership variances under the same plan or series of related transactions.

Foreign Taxes and Partnership Items

If a mandatory or elective U.S. tax year closing does not also close the foreign taxable year, the proposed regulations would allocate a portion of the foreign income tax accruing in the following U.S. taxable year back to the short U.S. taxable year ending on the closing date. The allocation would be based on foreign taxable income attributable to the pre-closing period under closing-of-the-books principles, and withholding taxes would be excluded. By contrast, a partnership taxable year generally would not close solely because the taxable year of a foreign corporate partner closes, which may place the foreign corporation’s distributive share of partnership items entirely in the post-closing short taxable year.

Multiple Classes of Stock and Changes in Share Count

When a CFC has multiple classes of stock, the proposed regulations generally allocate subpart F income among the classes based on a hypothetical distribution of “allocable earnings and profits.” Allocable earnings and profits generally equal the greater of the CFC’s section 964 earnings and profits or the sum of its subpart F income and tested income. Distribution rights are determined from all relevant facts and circumstances, but actual distributions during the year and certain redemption, liquidation, or return-of-capital rights are not taken into account. The proposal also contains special rules for cumulative preferred stock, dividend arrearages, and restrictions on distributions.

If the number of outstanding shares changes during the CFC year, the rules use a weighted average share count. The proposed regulations also include an anti-abuse rule authorizing adjustments to disregard transactions or arrangements undertaken as part of a plan with a principal purpose of avoiding federal income tax by changing pro rata shares.

Tested Income and Tested Loss

The revised section 951 allocation framework generally applies to tested income and tested loss. Tested income is allocated using the subpart F methodology, subject to special rules where tested loss was allocated to a class of stock in a prior year. Tested loss generally is allocated to common stock, with special rules for accrued but unpaid preferred dividends and for common stock with no liquidation value. These rules may cause tested loss and later tested income to be allocated to preferred or other junior equity classes in a manner that differs from the general hypothetical distribution approach.

Transition Rule for Certain Dividends

The proposed regulations also implement the OBBBA transition rule for certain dividends paid or deemed paid before the new pro rata share rules become effective. In general, a covered dividend is not treated as a dividend for purposes of the former section 951(a)(2)(B) reduction unless it increases the taxable income of a U.S. person subject to federal income tax. The determination is made after applying relevant exclusions and dividend-specific deductions, but generally applicable deductions such as net operating losses are disregarded for this purpose.

A U.S. shareholder claiming a former section 951(a)(2)(B) reduction for a dividend subject to the transition rule must attach a “Pro Rata Share Transition Rule Statement” to Form 5471. The statement must identify the relevant dividends, explain why they may be treated as dividends for purposes of the reduction, and describe how the shareholder determined that the dividends increased the taxable income of a U.S. person subject to federal income tax. The proposal includes look-through rules for partnerships and a safe harbor for certain de minimis owners of publicly traded partnership interests.

Related Regulatory Changes

The proposed regulations would phase out the extraordinary reduction rules under section 245A for taxable years of foreign corporations beginning after December 31, 2025. They also would update consolidated return rules, Form 5471 reporting requirements, and the section 951A regulations to reflect the revised pro rata share regime. The proposal does not amend the section 960 regulations, although the revised allocation of subpart F and tested income may change the amount and timing of foreign taxes deemed paid.

Effective Dates

The proposed sections 951, 951A, and 6038 rules generally would apply to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of U.S. shareholders for which those foreign corporation years are relevant. The transition dividend rules would apply to taxable years of a foreign corporation that include June 28, 2025, or begin after June 28, 2025, and before the corporation’s first taxable year beginning after December 31, 2025. Taxpayers and their related parties may rely on the proposed regulations before finalization if they apply all aspects of the proposed rules consistently and in their entirety. Comments and requests for a public hearing are due October 26, 2026.