Proposed Regulations to Exempt Corporate Shareholders from Sec. 956 Inclusion
On October 31, 2018, the IRS issued proposed regulations providing that Sec. 956, which requires U.S. shareholders to include deemed dividend income from its controlled foreign corporations (CFC) that invest in U.S. property, should not apply to corporate shareholders. Taxpayers may rely on the proposed regulations for tax years 2018 and thereafter until the finalization of the proposed regulations.
Generally, a U.S. shareholder of a foreign corporation is not subject to U.S. tax on the foreign earnings of such corporation, until the earnings is distributed to the shareholder (i.e. as a dividend). Section 956 was enacted alongside the subpart F regime to ensure that a CFC’s earnings not subject to immediate tax would be taxed when repatriated, either through a dividend or an effective repatriation. Most commonly encountered situation where an immediate taxation is triggered on a CFC’s earnings before the actual distribution would be a financing arrangement between the CFC and the U.S. shareholder (i.e. borrowing from foreign subsidiary). The proposed regulations would prevent U.S. corporate shareholders of CFCs from including deemed dividend income associated with the sec. 956.
Under sec. 245A, enacted as part of the Tax Cuts and Jobs Act of 2017, earnings of a CFC that are repatriated to a U.S. corporate shareholder as a dividend are generally exempt from tax because the shareholder is allowed to take an offsetting dividends-received deduction. However, a U.S. corporate shareholder’s sec. 956 inclusion is not eligible for the sec. 245A dividends-received deduction because it is a deemed dividend, not an actual distribution. The IRS believed that applying a different treatment on substantially the equivalent of a dividend was not the Congress’s intention, and therefore proposed regulations to exempt corporate shareholders from sec. 956 inclusion.
For additional detail, please click on the link below: