The US IRS today issued tax guidance designed to give relief to US persons that own stock in certain foreign corporations. The new guidance was prompted by a need to address unintended consequences of the repeal of section 958(b)(4) in the Tax Cuts and Jobs Act.
The Service said that as a result of the section 958(b)(4) repeal, stock of a foreign corporation owned by a foreign person can be attributed to a US person under section 318(a)(3) for purposes of determining whether a US person is a US shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. As a result, US persons that were not previously treated as US shareholders may be treated as US shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs.
New Rev. Proc. 2019-40 provides a safe harbor that limits the amount of inquiries required by US persons to determine if a foreign corporation is a CFC. According to an IRS release, the revenue procedure also allows certain unrelated minority US shareholders to rely on specified financial statement information to calculate their subpart F and global intangible low tax income inclusions and satisfy CFC reporting requirements when detailed tax information is unavailable. Penalty relief is also provided in some circumstances.
Rev. Proc. 2019-40 also announces that the IRS intends to amend the Form 5471 instructions to reduce the amount of information that unrelated minority US shareholders of the CFC are required to provide. It will also limit the filing requirements of US shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.
Proposed regulations, also issued today, address ownership attribution rules under Section 958 including for purposes of determining status as a CFC or a US shareholder.
The regulations also propose modifications to existing regulations that are intended to ensure, in certain appropriate circumstances, that the operation of certain rules is consistent with their application before the repeal of section 958(b)(4), the Service said.
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