Treasury and the IRS recently issued four notices announcing proposed regulations that would implement key changes to the international tax provisions of the Internal Revenue Code, as enacted by the One Big Beautiful Bill Act (OBBBA).[1] The guidance addresses (i) the foreign tax credit calculation when a controlled foreign corporation (CFC) must conform its taxable year to its shareholder’s, (ii) a retroactive change to determining a US shareholder’s pro rata share of subpart F income and global intangible low-taxed income (GILTI), (iii) a new limit on credits for foreign income taxes attributable to distributions of previously taxed earnings and profits (PTEP), and (iv) a change to the definition of “deduction eligible income,” which is relevant for the tax calculation of domestic corporations selling to foreign persons. While the notices generally provide timely guidance (primarily for near-term issues in implementing OBBBA provisions), Treasury and the IRS have promised to provide additional significant international guidance in 2026 to meet the goals of their priority guidance plan and provide taxpayers with more certainty as to the consequences of the OBBBA’s changes to the Code.

This alert describes the recent guidance and identifies certain issues and implications that warrant additional consideration by affected taxpayers, including impacts on their modeling, tax planning, and reporting requirements.

CFC Year-End Change (Notice 2025-72)

The OBBBA forces CFCs that previously elected a US taxable year that begins one month before the taxable year of its majority US shareholder[2] to change to the same taxable year as such shareholder, effective for taxable years beginning after November 30, 2025.[3] In the transition, CFCs will have a one-month taxable year followed by a regular 12-month taxable year. For example, a CFC that previously had a taxable year ending on November 30, 2025, would have a one-month taxable year (December 2025) followed by a 12-month taxable year (2026 calendar year).

Under current law, an accrual basis CFC with a November 30 US taxable year would accrue twelve months of foreign income taxes for 2025 in a one-month taxable year (December 2025).[4] Without regulatory relief, such income taxes could create a tested loss (or deficit in earnings and profits) in the short year, rendering such foreign income taxes uncreditable. Notice 2025-72 provides guidance for allocating the 2025 income taxes between the short taxable year and the following calendar year by allowing taxpayers to choose between a closing-of-the-books method and a ratable allocation method (applying the principles for affiliated groups filing a consolidated return under Treas. Reg. §1.1502-76(b)).

A&M Insight

The mandatory change in a CFC’s tax year end will generally impact the US shareholder’s foreign income inclusion calculations for the tax years ending December 31, 2025, and December 31, 2026. For 2025 tax years, affected multinational groups will recognize their foreign income taxes accruing on December 31, 2024, in the CFC tax year ending November 30, 2025, plus one additional month of income (December 1, 2025, through December 31, 2025), and a portion of foreign income taxes accruing on December 31, 2025. In addition, the requirement to shift a portion of the 2025 foreign income taxes into 2026 could have significant consequences for CFCs, including increasing their CFC’s effective tax rate for 2026. This is because in addition to the 2026 foreign taxes that would otherwise accrue, the CFC would likely be allocated a substantial portion of the 2025 foreign income taxes.

The resulting benefit of including additional foreign tax credits in the 2026 net CFC tested income (and subpart F income) requires detailed modeling. In certain cases, additional planning may be required to recognize the benefit of the additional foreign tax credits. Such proactive planning should be initiated early in 2026, taking into account other business objectives.

Change to Pre-2026 Pro Rata Share Rules (Notice 2025-75)

Under the OBBBA, effective for CFC taxable years beginning after December 31, 2025, a US shareholder owning shares of a CFC at any time during the CFC’s taxable year must include its pro rata share of the CFC’s subpart F income and net CFC tested income (NCTI) for the year. Under pre-OBBBA law, only US shareholders owning shares on the last day of the CFC’s taxable year are taxed on their pro rata share of subpart F income and GILTI inclusion amount.

While this prospective change in the law is well known, embedded in the OBBBA is a statutory (non-Code) “transition rule” that alters the pre-OBBBA pro rata share rule by disallowing a reduction in a US shareholder’s pro rata share of subpart F income and GILTI inclusion amount for dividends paid (or deemed paid) by the CFC during portions of 2024, all of 2025, and portions of 2026 when such dividends do not increase the taxable income of a US person.[5] Notice 2025-75 describes the proposed regulations that would implement this disallowance rule. It also clarifies that this rule applies after application of the limitation to the section 245A dividends received deduction in Treas. Reg. §1.245A-5.

A&M Insight

This retroactive change in the law appears aimed at bolstering Treasury’s authority for Treas. Reg. §1.245A-5 while expanding its scope. Any US shareholder of a CFC that paid a dividend after 2023 should determine whether it has under reported its subpart F income or GILTI inclusion amount as a result of not applying the disallowance rule. In addition, affected taxpayers should take note of the additional documentation and reporting rules described in the notice.

Reduced Foreign Tax Credit on PTEP Distributions (Notice 2025-77)

In adding the GILTI regime to the Code, the Tax Cuts and Jobs Act (TCJA) also limited the foreign income taxes attributable to CFC tested income that are available for credit by a US shareholder to 80 percent of the domestic corporation’s tested income inclusion percentage multiplied by the aggregate foreign tested income taxes paid or accrued by its CFCs (section 960(d)). The OBBBA raised this limit to 90 percent. The OBBBA also added new section 960(d)(4), which disallows a credit for 10 percent of any foreign income taxes paid or accrued (or deemed paid) with respect to distributions of section 951A PTEP after June 28, 2025. The language of the statute was not clear whether the effective date of June 28, 2025, was intended to reference PTEP distributions after such date or PTEP arising from inclusions after such date.[6]

Notice 2025-77 clarifies that the effective date of section 960(d)(4) is based on the taxable year of the US shareholder in which the tested income inclusion occurred; not the taxable year of the CFC in which the tested income earnings were accrued or were distributed. Thus, section 960(d)(4) will not apply to PTEP distributions after June 28, 2025, that resulted from a CFC tested income inclusion before that date.

A&M Insight

Taxpayers now would be required to maintain records to track section 951A PTEP and the associated foreign income taxes attributable to pre- and post-effective date PTEP inclusions. Importantly, distributions made prior to June 28, 2025, from current year PTEP (e.g., tested income inclusions on December 31, 2025) are subject to the 10 percent haircut. This may have an immediate impact on a company’s tax provision for distributions made in the first half of 2025. Similar rules will apply to reclassified section 951A PTEP. See Prop. Reg. §1.960-3 and Prop. Reg. §1.959-2 for guidance on the maintenance of annual PTEP accounts by PTEP group. Notice 2025-77 thus would add an additional four PTEP groups to the 10 groups described in Prop. Reg. §1.959-2.

FDDEI Exclusion for Intangible & Depreciable Property Sales (Notice 2025-78)

While the OBBBA significantly expanded the section 250 benefit for foreign-derived deduction eligible income (FDDEI), it limited the benefit by modifying the definition of deduction eligible income (DEI). Under the OBBBA, DEI excludes any income and gain from the sale or other disposition (including a section 367(d) transaction) of intangible property (as defined in section 367(d)(4)) and any other property of a type subject to depreciation, amortization, or depletion by the seller for sales or other dispositions after June 16, 2025. The OBBBA also modified the section’s broad definition of “sale” to exclude any lease, license, exchange, or other disposition solely for purposes of this new DEI exclusion. Thus, income from a license of intangible property remains included in DEI and therefore FDDEI.

A&M Insight

Notice 2025-78, which describes proposed regulations for implementing the new DEI exclusion, includes a related party anti-abuse rule. Taxpayers planning to transfer property that is depreciable in the hands of one subsidiary to a related party that holds the property, for example, as inventory, and not depreciable, could be subject to this rule.

A&M Tax Says

Taxpayers may rely on the guidance under the four OBBBA international tax notices before proposed regulations are published in the Federal Register, if for each notice, they apply the rules in their entirety and consistently for all applicable tax years. Modeling and analysis will be important to understand the consequences of these rules announced in these notices. In addition, proactive business and tax planning may mitigate potential adverse consequences and risks, such as those affecting foreign tax credits.

While the guidance is helpful and welcome, taxpayers and practitioners await the other items of significant international tax guidance included in the Treasury-IRS Fiscal Year 2025-2026 Priority Guidance Plan addressing other OBBBA changes, including (i) additional guidance for determining a US shareholder’s pro rata share of subpart F income and tested income, (ii) guidance regarding the reinstatement of section 958(b)(4) (barring attribution of shares owned by a foreign person to a US person) for purposes of subpart F, (iii) the taxation of US multinational groups that are part of a larger foreign-parented group (new section 951B), and (iv) changes relating to the base erosion minimum tax amount (section 59A). These changes generally take effect beginning January 1, 2026.

A&M Tax international tax advisors are available to help assess how the recent and forthcoming guidance may affect your company’s tax liability and assist you in proactively addressing any potential tax consequences.

Related insights:

https://www.alvarezandmarsal.com/thought-leadership/one-big-beautiful-house-bill-insights-into-potential-tax-reform