On Friday, June 14 (“Flag Day”), the Internal Revenue Service (“IRS”) and the Treasury Department issued several articles of guidance under the Tax Cuts and Jobs Act of 2017 (TCJA). This includes final, temporary, and proposed regulations (collectively referred to as the “Regulations”). The Regulations cover a wide variety of topics affecting U.S. based multinational organizations, private equity funds, U.S. individual owners of foreign corporations, and others.
The following is a high-level overview of three of the key features of the Regulations:
- GILTI High-Taxed Income Exception: The proposed regulations (REG-101828-19) would broaden the definition of income that can be excluded from tested income, at the election of a Controlled Foreign Corporation’s (“CFC”) U.S. shareholders, to cover any income derived by a CFC that is subject to an effective rate of foreign income tax that is at least 90% of the U.S. corporate rate. The regulations also provide for the high-taxed test to be applied at the CFC level and only with respect to current year income and foreign taxes, both for GILTI and for Subpart F income purposes. The election would apply to all CFCs that are controlled by the same U.S. shareholder, or by a group of U.S. shareholders owning identical interest in the CFCs. The regulations would apply only to taxable years of foreign corporations beginning after they are finalized.
- Aggregate Treatment of Domestic Partnerships and S Corporations for Subpart F & GILTI Purposes: The proposed regulations significantly alter the tax treatment of domestic flow-through entities (partnerships and S-corporations) that own interests in CFCs. For purposes of determining amounts taxable as GILTI, the regulations treat a U.S. partnership or S-corporation as an aggregate with respect to all partners or shareholders (this treatment already applies to foreign partnerships). Thus, U.S. persons who are partners but not U.S. shareholders (i.e., who do not hold directly, indirectly, or constructively 10% or more of the vote or value of the foreign corporation owned by the U.S. partnership or S Corp) would not be required to take into account any subpart F income or GILTI items. It is important to note that a partner or S corporation shareholder would take into income only the percentage of subpart F income and GILTI items that it owns directly or indirectly (not constructively). A partner or S corporation shareholder who owns CFC stock only constructively is not required to take subpart F income or GILTI items into account, although they may be a U.S. shareholder based on constructive ownership. Partnerships and S-corporations can choose to apply these regulations retroactively to CFC years beginning after 2017, subject to certain consistency rules.
- Interaction of Section 245A with Subpart F Income and GILTI: Section 245A generally allows a dividends received deduction when dividends are paid by foreign corporations to a U.S. corporate shareholder that owns 10% or more of the stock of the foreign corporation. The Treasury Department issued Temporary Regulations (T.D. 9865) to deny the benefit of section 245A in a limited set of transactions in which section 245A might be used, in Treasury’s view, to avoid U.S. tax. These transactions include those in which stock of a CFC is sold by a U.S. shareholder to another U.S. person, and the selling shareholder recognizes gain that is treated as a dividend under section 1248. In addition, these regulations deny the 245A benefit from dividends paid from earnings related to certain transaction undertaken prior to the effective date of the GILTI regulations that the IRS deems inappropriate. The temporary regulations apply retroactively to distributions made after December 31, 2017.
Alvarez & Marsal Says:
The features listed above cover just a few of the items in the regulations released on June 14. Stay tuned for future insights with regards to the new rules discussed above and other content included in the Regulations.