As promised, the IRS has issued proposed regulations to rein in the impact of the Repeal of Section 958(b)(4). Unfortunately the regulations address only one of a myriad of what seem to be unintended consequences of this particular change in the law and leave most of the unintended outcomes unaddressed.
For some background on the impact of the repeal of Section 958(b)(4) see: Determining if a Foreign Company is a CFC.
The regulations address this issue by eliminating the downward attribution concept entirely from determining related party and control status, but only for certain Subpart F provisions including the related party interest look-through rules and also the foreign base company sales related party sales rule. This means that for purposes of deciding who is a related party for some of the Subpart F Foreign Base Company Income rules, a partnership or corporation will not be deemed to own the stock of its partners or shareholders.
This interpretation can be advantageous to taxpayers in some instances and a disadvantage in others depending on the facts and circumstances. In either case this very limited narrowing of the impact of the repeal of section 958(b)(4) is a far cry from the interpretation many in the international tax and multi-national community were hoping for. It is unclear at this point if this is the extent of the relief promised by the IRS.
Stay tuned for updates.
In the meantime, if you have any questions around the proposed regulations or anything else, please contact our International Tax Services team by filling out the form below.
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