The US IRS and Treasury today issued proposed regulations aiming to remove inconsistencies between the section 956 “dividend equivalent” regulations and the international tax scheme enacted in the 2017 Tax Cuts and Jobs Act (TCJA).
Notwithstanding the TCJA’s 2017 exemption for actual dividends from foreign subsidiaries, the TCJA retained section 956 which requires a US shareholder of a controlled foreign corporation (CFC) to currently include in income earnings of the CFC that are reinvested in United States property.
Under today’s proposed regulations, section 956 will not apply to US corporate shareholders to the extent necessary to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations. Thus, under section 245A and the proposed regulations neither an actual dividend to a corporate US shareholder nor such a shareholder’s amount determined under section 956 will result in additional US tax, the government said.
To reach this outcome, the proposed regulations provide that the amount otherwise determined under section 956 with respect to a US shareholder for a taxable year of a CFC is reduced to the extent that the US shareholder would be allowed a deduction under section 245A if the US shareholder had received a distribution from the CFC in the same amount.
Special rules are provided for indirect ownership. Also, the rules do not apply to shareholders other than US corporations.
The government said that the rules would reduce burdens on taxpayers that would otherwise undergo costly planning to avoid Section 956 and take advantage of the new participation exemption.
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