On October 31, 2018, the U.S. Treasury Department and the Internal Revenue Service issued proposed regulations that would limit the circumstances under which a taxable “deemed repatriation” of the earnings of a controlled foreign corporation (a CFC) under Section 956 of the tax code would be taxable to a corporate 10% U.S. shareholder. 

Very generally, under Section 956, a CFC’s previously untaxed earnings may be taxable to a 10% U.S. shareholder if the CFC guarantees the shareholder’s debt, the shareholder pledges two-thirds or more of the CFC’s stock as collateral for a loan, or the CFC invests in U.S. stock, obligations of a U.S. person, or certain other United States property.

Under the Tax Cuts and Jobs Act, dividends paid by a CFC to a corporate 10% U.S. shareholder generally are exempt from tax if the shareholder has held the CFC’s stock for more than one year and certain other requirements are satisfied.  However, the Tax Cuts and Jobs Act does not explicitly provide a similar exemption for income inclusions under Section 956.  The proposed regulations generally would exempt a 10% U.S. shareholder from tax under Section 956 if the 10% U.S. shareholder would not have been subject to tax on an actual dividend from the CFC.

Taxpayers generally may rely on the proposed regulations for taxable years of a CFC beginning after December 31, 2017, and for taxable years of a U.S. shareholder in which or with which those taxable years of the CFC end, provided that the taxpayer and United States persons that are related to the taxpayer consistently apply the proposed regulations with respect to all CFCs in which they are 10% U.S. shareholders.