Previously Taxed Earnings and Profits and Related Basis Adjustments

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Part 1</CFR> <DEPDOC>[REG-105479-18]</DEPDOC> <RIN>RIN 1545-BO61</RIN> <SUBJECT>Previously Taxed Earnings and Profits and Related Basis Adjustments</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations regarding previously taxed earnings and profits of foreign corporations and related basis adjustments. The proposed regulations affect foreign corporations with previously taxed earnings and profits and their shareholders. </SUM> <DATES> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by March 3, 2025. </DATES> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically. Submit electronic submissions via the Federal eRulemaking Portal at <E T="03">www.regulations.gov</E> (indicate IRS and REG-105479-18) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comment submitted electronically or on paper to its public docket. Send paper submissions to: CC:PA:01:PR (REG-105479-18), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations generally, Elena M. Madaj at (202) 317-3576; concerning the portions of the proposed regulations relating to section 1502, Jeremy Aron-Dine at (202) 317-6847; concerning the portions of the proposed regulations relating to partnerships, Jennifer N. Keeney at (202) 317-6850; and concerning submissions of comments and requests for a public hearing, contact the Publications and Regulations Section of the Office of Associate Chief Counsel (Procedure and Administration) by email at <E T="03">publichearings@irs.gov</E> (preferred) or by telephone at (202) 317-6901 (not toll-free numbers). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains proposed additions and amendments to 26 CFR part 1 (proposed regulations) under sections 959 and 961 and certain other provisions of the Internal Revenue Code (Code) regarding previously taxed earnings and profits (PTEP). As discussed in the Explanation of Provisions, the primary provisions of the proposed regulations are issued pursuant to the express delegations of authority under sections 245A(g), 743(b), 904(d)(7), 951A(f)(1)(B), 960(f), 961(a) through (c), 965(o), 986(c)(2), 989(c), and 1502. The proposed regulations are also issued pursuant to the express delegation of authority under section 7805(a). <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. Scope</HD> The Background describes PTEP, including provisions giving rise to PTEP and provisions regarding the treatment of PTEP, and related guidance and issues under existing law. Any term used but not defined in this preamble has the meaning given to it in the proposed regulations. <HD SOURCE="HD2">II. PTEP</HD> <HD SOURCE="HD3">A. Overview</HD> Sections 959 and 961 are intended to operate in tandem to prevent double taxation of PTEP, which is earnings and profits (E&P) of a foreign corporation described in section 959(c)(1) or (c)(2). Section 959 designates amounts of E&P as PTEP based on amounts included, or treated as included, in gross income with respect to the foreign corporation under section 951(a). The remainder of this part II of the Background summarizes provisions giving rise to PTEP, provisions regarding the treatment of PTEP, and existing regulations under sections 959 and 961. <HD SOURCE="HD3">B. Provisions Giving Rise to PTEP</HD> <HD SOURCE="HD3">1. Section 951(a)</HD> Section 951(a)(1)(A) requires a United States shareholder (as defined in section 951(b) or, if applicable, section 953(c)(1)(A)) of a foreign corporation to include in gross income its pro rata share of the corporation's subpart F income (as defined in section 952) for a taxable year of the corporation (subpart F income inclusion), if the corporation is a controlled foreign corporation (CFC) (as defined in section 957(a) or, if applicable, section 957(b) or 953(c)(1)(B)) at any time during the taxable year and the shareholder owns (within the meaning of section 958(a)) stock of the corporation on the last day of the taxable year on which the corporation is a CFC (last relevant day). Pursuant to section 951(a)(1)(B), the United States shareholder is generally required to also include in gross income its amount determined under section 956 (section 956 amount) for the taxable year of the foreign corporation (section 956 inclusion). This amount represents an effective repatriation of E&P and is computed based on certain United States property held by the corporation. Ownership of stock within the meaning of section 958(a) means stock owned directly and stock owned indirectly through foreign entities, including domestic partnerships to the extent treated as foreign partnerships under § 1.958-1(d)(1) (discussed in part III.B of the Background). For purposes of the remainder of this preamble, a reference to stock ownership means stock owned within the meaning of section 958(a). Section 951(a)(2) determines a United States shareholder's pro rata share of a foreign corporation's subpart F income by first allocating a portion of such subpart F income to the United States shareholder, and then reducing such allocation in accordance with section 951(a)(2)(B) to take into account certain distributions where ownership of the stock of the foreign corporation is acquired by the United States shareholder during the corporation's taxable year. <E T="03">See</E> § 1.951-1(b). Subpart F income allocated to a United States shareholder before the application of section 951(a)(2)(B) is computed by multiplying the subpart F income by a fraction, the numerator of which is the portion of the foreign corporation's hypothetical distribution described in § 1.951-1(e) that would be distributed with respect to the shareholder's stock of the corporation, and the denominator of which is the amount of such hypothetical distribution. <E T="03">See</E> § 1.951-1(e). The amount of the hypothetical distribution is equal to the foreign corporation's allocable E&P, which is generally the corporation's E&P for the taxable year (not reduced by distributions during the year). <E T="03">See</E> § 1.951-1(e)(1)(ii). A special rule under section 245A(e) treats certain hybrid dividends received by a CFC as subpart F income of the receiving CFC for purposes of section 951(a)(1)(A). Similarly, section 964(e)(4) treats certain gain from a sale of stock of a foreign corporation by a CFC as subpart F income of the selling CFC for purposes of section 951(a)(1)(A). Consequently, a United States shareholder of such a receiving CFC or selling CFC includes in gross income under section 951(a)(1)(A) its pro rata share of such subpart F income. <HD SOURCE="HD3">2. Section 951A(a)</HD> Pursuant to section 951A(a), a United States shareholder of a CFC is required to include in gross income its global intangible low-taxed income (GILTI inclusion). <E T="03">See</E> § 1.951A-1(b). A United States shareholder's GILTI inclusion is determined by taking into account the shareholder's pro rata share of tested items (as defined in § 1.951A-1(f)(5)) of CFCs in which the shareholder owns stock, such as tested income, tested loss, and qualified business asset investment. <E T="03">See</E> § 1.951A-1(c). A United States shareholder's pro rata share of a CFC's tested items is determined in the same manner as a pro rata share of subpart F income under section 951(a)(2), subject to certain modifications. <E T="03">See</E> § 1.951A-1(d). Section 951A(f)(1)(A) provides that a GILTI inclusion is treated in the same manner as a subpart F income inclusion for purposes of applying certain provisions of the Code, including sections 959 and 961. Section 951A(f)(1)(B) grants the Secretary authority to provide rules for applying section 951A(f)(1)(A) to other provisions of the Code in any case in which the determination of subpart F income is required to be made at the level of the CFC. <HD SOURCE="HD3">3. Section 1248(a) or (f)</HD> Section 1248(a) requires a United States person that satisfies certain ownership requirements with respect to stock in a foreign corporation to include gain recognized on a sale or exchange of stock in such foreign corporation in gross income as a dividend, to the extent of the E&P of the foreign corporation attributable to the stock (including E&P of certain lower-tier foreign corporations pursuant to section 1248(c)(2), but not including PTEP pursuant to section 1248(d)(1)). Section 1248(f) provides similar rules for certain distributions in nonrecognition transactions. Section 959(e) treats an amount included in gross income of any person as a dividend under section 1248(a) or (f) as an amount included in gross income under section 951(a)(1)(A), for purposes of section 959. <HD SOURCE="HD3">4. Section 965</HD> The transition tax imposed under section 965 as part of the Tax Cuts and Jobs Act, Public Law 115-97, 131 Stat. 2054 (2017) (the Act) increased the subpart F income of certain foreign corporations and treated such foreign corporations as CFCs for purposes of section 951 (if not already the case). Section 965(a) and (e). Consequently, a United States sha ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 784k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━