Ownership Attribution Under Section 958 for Purposes of Sections 367(a) and 954(c)(6)
| Published date | 22 September 2020 |
| Citation | 85 FR 59481 |
| Record Number | 2020-17550 |
| Section | Proposed rules |
| Court | Internal Revenue Service |
59481
Federal Register / Vol. 85, No. 184 / Tuesday, September 22, 2020 / Proposed Rules
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[[REG–110059–20]
RIN 1545–BP83
Ownership Attribution Under Section
958 for Purposes of Sections 367(a)
and 954(c)(6)
AGENCY
: Internal Revenue Service (IRS),
Treasury.
ACTION
: Notice of proposed rulemaking.
SUMMARY
: This document contains
proposed regulations relating to the
modification of section 958(b) of the
Internal Revenue Code (‘‘Code’’) by the
Tax Cuts and Jobs Act, which was
enacted on December 22, 2017. The
proposed regulations modify the
ownership attribution rules applicable
to outbound transfers of stock or
securities of a domestic corporation
under section 367(a). The proposed
regulations also narrow the scope of
foreign corporations that are treated as
controlled foreign corporations for
purposes of the look-through rule under
section 954(c)(6). The proposed
regulations affect United States persons
that transfer stock or securities of a
domestic corporation to a foreign
corporation that are subject to section
367(a), and United States shareholders
of foreign corporations.
DATES
: Written or electronic comments
and requests for a public hearing must
be received by November 20, 2020.
Requests for a public hearing must be
submitted as prescribed in the
‘‘Comments and Requests for a Public
Hearing’’ section.
ADDRESSES
: Commenters are strongly
encouraged to submit public comments
electronically. Submit electronic
submissions via the Federal
eRulemaking Portal at
www.regulations.gov (indicate IRS and
REG–110059–20) by following the
online instructions for submitting
comments. Once submitted to the
Federal eRulemaking Portal, comments
cannot be edited or withdrawn. The IRS
expects to have limited personnel
available to process public comments
that are submitted on paper through
mail. Until further notice, any
comments submitted on paper will be
considered to the extent practicable.
The Department of the Treasury
(Treasury Department) and the IRS will
publish for public availability any
comment submitted electronically, and
to the extent practicable on paper, to its
public docket. Send paper submissions
to: CC:PA:LPD:PR (REG–REG–110059–
20), Room 5203, Internal Revenue
Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT
:
Concerning the proposed regulations,
Christina G. Daniels at (202) 317–6934
or Lynlee C. Baker at (202) 317–6937;
concerning submissions of comments or
requests for a public hearing, Regina
Johnson at (202) 317–5177 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION
:
Background
I. Sections 318 and 958(b)(4)
Section 958 provides rules for
determining direct, indirect, and
constructive stock ownership. Under
section 958(a)(1), stock is considered
owned by a person if it is owned
directly or is owned indirectly through
certain foreign entities under section
958(a)(2). Under section 958(b), the
constructive stock ownership rules of
section 318 apply, with certain
modifications, to the extent that the
effect is to treat any United States
person as a United States shareholder
within the meaning of section 951(b)
(‘‘U.S. shareholder’’) of a foreign
corporation, to treat a person as a
related person within the meaning of
section 954(d)(3), to treat the stock of a
domestic corporation as owned by a
U.S. shareholder of a controlled foreign
corporation within the meaning of
section 957 (‘‘CFC’’) for purposes of
section 956(c)(2), or to treat a foreign
corporation as a CFC.
As in effect before repeal, section
958(b)(4) provided that section
318(a)(3)(A), (B), and (C) (providing for
so-called ‘‘downward attribution’’) was
not to be applied so as to consider a
United States person as owning stock
owned by a person who is not a United
States person (a ‘‘foreign person’’).
Effective for the last taxable year of
foreign corporations beginning before
January 1, 2018, and each subsequent
year of the foreign corporations, and for
the taxable years of U.S. shareholders in
which or with which such taxable years
of the foreign corporations end, section
958(b)(4) was repealed by section 14213
of the Tax Cuts and Jobs Act, Public
Law 115–97 (2017) (the ‘‘Act’’). As a
result of this repeal, stock of a foreign
corporation owned by a foreign person
can be attributed to a United States
person under section 318(a)(3) for
various purposes, including for
purposes of determining whether a
United States person is a U.S.
shareholder of the foreign corporation
and, therefore, whether the foreign
corporation is a CFC. In other words, as
a result of the repeal of section
958(b)(4), section 958(b) now provides
for downward attribution from a foreign
person to a United States person in
circumstances in which section 958(b),
before the Act, did not so provide. As
a result, among other consequences,
United States persons that were not
previously treated as U.S. shareholders
may be treated as U.S. shareholders, and
foreign corporations that were not
previously treated as CFCs may be
treated as CFCs.
On October 2, 2019, the Treasury
Department and the IRS published
proposed regulations (REG–104223–18)
relating to the repeal of section 958(b)(4)
in the Federal Register (84 FR 52398)
(the ‘‘2019 proposed regulations’’). The
2019 proposed regulations are issued as
final regulations in the Rules and
Regulations section of this issue of the
Federal Register. Consistent with the
purpose underlying the 2019 proposed
regulations, these proposed regulations
propose additional changes that are
intended to ensure that certain rules
under sections 367(a) and 954(c)(6)
apply in the same manner in which they
applied before the repeal of section
958(b)(4).
II. Section 367(a)
Section 367(a)(1) generally provides
that if a United States person transfers
property to a foreign corporation in
connection with an exchange described
in section 332, 351, 354, 356, or 361, the
foreign corporation will not be treated
as a corporation for purposes of
determining the extent to which gain is
recognized on the transfer.
Section 1.367(a)–3 provides rules
regarding the treatment of transfers of
stock or securities by a United States
person to a foreign corporation in an
exchange described in section 367(a)(1)
(‘‘outbound transfer’’). Section 1.367(a)–
3(b)(1) generally requires a United
States person to enter into a gain
recognition agreement, pursuant to rules
under § 1.367(a)–8, to obtain
nonrecognition treatment on an
outbound transfer of stock or securities
of a foreign corporation if the United
States person owns at least five percent
(applying the attribution rules of section
318, as modified by section 958(b)) of
the transferee foreign corporation
immediately after the transfer. To obtain
nonrecognition treatment on outbound
transfers of stock or securities of a
domestic corporation (the ‘‘U.S. target
company’’), § 1.367(a)–3(c)(1) generally
requires the U.S. target company to meet
certain reporting requirements and that
each of four conditions is satisfied: (1)
Fifty percent or less of both the total
voting power and the total value of the
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Federal Register / Vol. 85, No. 184 / Tuesday, September 22, 2020 / Proposed Rules
stock of the transferee foreign
corporation is received in the
transaction, in the aggregate, by U.S.
transferors; (2) fifty percent or less of
each of the total voting power and the
total value of the stock of the transferee
foreign corporation is owned, in the
aggregate, immediately after the transfer
by United States persons that are either
officers or directors of the U.S. target
company or that are five-percent target
shareholders (as defined in § 1.367(a)–
3(c)(5)(iii)); (3) either the United States
person is not a five-percent transferee
shareholder (as defined in § 1.367(a)–
3(c)(5)(ii)), or the United States person
enters into a gain recognition agreement
as provided in § 1.367(a)–8; and (4) the
active trade or business test (as defined
in § 1.367(a)–3(c)(3)) is satisfied. For
purposes of applying these tests,
§ 1.367(a)–3(c)(4)(iv) states that, except
as otherwise provided, the stock
attribution rules of section 318, as
modified by section 958(b), apply in
determining the ownership or receipt of
stock, securities, or other property.
III. Section 954(c)(6)
Section 954(c)(6)(A) generally
provides that for purposes of section
954(c), dividends, interest, rents, and
royalties received or accrued by a CFC
from a CFC that is a related person are
not treated as foreign personal holding
company income to the extent
attributable or properly allocable
(determined under rules similar to the
rules of section 904(d)(3)(C) and (D)) to
income of the related person that is
neither subpart F income nor income
treated as effectively connected with the
conduct of a trade or business in the
United States (the ‘‘section 954(c)(6)
exception’’). In general, and subject to
certain limitations, the section 954(c)(6)
exception is intended to make U.S.-
based multinational corporations more
competitive with foreign-based
multinational corporations by allowing
U.S.-based multinational corporations to
reinvest their active foreign earnings
where they are needed without giving
rise to immediate additional taxation
under the subpart F provisions. See H.R.
Rep. No. 109–304 at 45 (2005).
Section 954(c)(6)(A) provides that the
Secretary shall prescribe such
regulations as may be necessary or
appropriate to carry out the provision,
including regulations to prevent the
abuse of the purposes of the provision.
As most recently extended by the
Further Consolidated Appropriations
Act, Public Law 116–94 (2020), section
954(c)(6) applies to taxable years of
foreign corporations beginning after
December 31, 2005, and before January
1, 2021, and to taxable years of U.S.
shareholders with or within which such
taxable years of foreign corporations
end.
Notice 2007–9, 2007–5 I.R.B. 401,
describes guidance that the Treasury
Department and the IRS intend to issue
regarding the application of section
954(c)(6), including certain anti-abuse
rules. That notice, in section 7(d),
provides, in relevant part:
When the use of options or similar
interests causes a foreign corporation to
become a CFC payor, and a principal purpose
for the use of the options or similar interests
is to qualify dividends, interest, rents, or
royalties paid by the foreign corporation for
the section 954(c)(6) exception, the
dividends, interest, rents, or royalties
received or accrued from such foreign
corporation will not be treated as being
received or accrued from a CFC payor and,
therefore, will not be eligible for the section
954(c)(6) exception.
A rule similar to that in section 7(d)
of Notice 2007–9 was included in
§ 1.954–1(f)(2)(iv), T.D. 9883, 84 FR
69107 (2019).
Explanation of Provisions
I. Changes in Connection With Section
367(a)
As discussed in part II of the
Background section of this preamble,
§ 1.367(a)–3(c)(4)(iv) states that, except
as otherwise provided, the constructive
stock ownership rules of section 318, as
modified by section 958(b), apply for
purposes of determining the ownership
or receipt of stock, securities or other
property under § 1.367(a)–3(c). The
repeal of section 958(b)(4) and the
resulting application of section
318(a)(3)(A), (B), and (C) to the stock
ownership tests under § 1.367(a)–3(c)(1)
can cause a transfer that previously
would have satisfied the conditions set
forth in § 1.367(a)–3(c)(1) to no longer
qualify for the exception to section
367(a)(1) because, for example, more
shareholders are now considered to be
five-percent target shareholders as a
result of downward attribution. The
conditions set forth in § 1.367(a)–3(c)(1)
and the attribution rule in § 1.367(a)–
3(c)(4)(iv) were promulgated when
section 958(b)(4) did not allow for
downward attribution from foreign
persons.
The Treasury Department and the IRS
have determined that, for purposes of
applying § 1.367(a)–3(c)(1)(i), (ii), and
(iv), a United States person’s
constructive ownership interest should
not include an interest that is treated as
owned as a result of downward
attribution from a foreign person as it
would inappropriately treat the United
States person as owning an interest it
would not have owned under the rules
in effect when those regulations were
promulgated. The Treasury Department
and IRS have determined, however, that
the constructive ownership rules as they
apply to the condition set forth in
§ 1.367(a)–3(c)(1)(iii) (which requires
that either the United States person is
not a five-percent transferee shareholder
or the United States person must enter
into a gain recognition agreement)
should not be modified, and thus will
continue to take into account downward
attribution. The continued application
of downward attribution for purposes of
§ 1.367(a)–3(c)(1)(iii) results in a
consistent application of the gain
recognition agreement provisions for
outbound transfers of stock or securities
of domestic and foreign corporations.
Although the Act’s repeal of section
958(b)(4) may require a United States
person to enter into a gain recognition
agreement in connection with an
outbound transfer of stock or securities
of a foreign corporation to obtain
nonrecognition treatment when no such
agreement would have been required
before the Act, no changes are being
proposed to § 1.367(a)–3(b)(1) because
the Treasury Department and the IRS
have decided this result is appropriate
in light of the policies of section 367(a)
and the Act.
Therefore, and in accordance with the
regulatory authority provided in section
367(a), the proposed regulations revise
§ 1.367(a)–3(c)(4)(iv) to apply the
attribution rules of section 318, as
modified by section 958(b) but without
applying section 318(a)(3)(A), (B), and
(C) to treat a United States person as
owning stock that is owned by a foreign
person, for all purposes of § 1.367(a)–
3(c) other than for purposes of
determining whether a U.S. person is a
five-percent transferee shareholder
under § 1.367(a)–3(c)(1)(iii).
II. Changes in Connection With Section
954(c)(6)
As discussed in part III of the
Background section of this preamble,
Congress enacted section 954(c)(6) to
generally allow U.S.-based
multinational corporations to reinvest
their active foreign earnings (in other
words, earnings of CFCs subject to U.S.
tax deferral) where they are needed
outside the United States without giving
rise to immediate additional taxation
under the subpart F provisions.
Accordingly, the section 954(c)(6)
exception is intended to apply to
payments between CFCs of a U.S.-based
multinational group that have active
foreign earnings that are subject to the
subpart F provisions. If a foreign
corporation is a CFC solely by reason of
downward attribution from a foreign
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person, however, most or all of that
foreign corporation’s earnings typically
are not under U.S. taxing jurisdiction
(that is, subject to the subpart F and
GILTI provisions or, in some cases,
taxed in the United States when
distributed to its owners) and, as a
result, amounts paid or accrued by that
foreign corporation to another foreign
corporation that is a CFC (without
regard to downward attribution) should
not be eligible for the section 954(c)(6)
exception. For example, assume a
foreign corporation (FC1) is a CFC
(without regard to downward
attribution) and a member of a foreign
parented multinational group, the
common parent of which is not a CFC,
and another foreign corporation (FC2)
that is also a member of the
multinational group is a CFC but solely
by reason of downward attribution and
does not have any U.S. shareholders
that own (within the meaning of section
958(a)) stock in such CFC (a ‘‘section
958(a) U.S. shareholder’’). FC1 makes a
loan to FC2. In the absence of
regulations, interest received by FC1
from FC2 would be eligible for the
exception under section 954(c)(6) even
though the income of FC2 is not taxed
by the United States. In comparison, if
FC1 made a loan to the foreign parent
instead of to FC2, interest received by
FC1 from the foreign parent would not
be eligible for the exception under
section 954(c)(6).
Therefore, in accordance with the
regulatory authority provided in section
954(c)(6)(A), the proposed regulations
limit the application of the section
954(c)(6) exception to amounts received
or accrued from foreign corporations
that are CFCs without applying section
318(a)(3)(A), (B), and (C) to treat a
United States person as owning stock
that is owned by a foreign person. The
modification in these proposed
regulations is consistent with the
treatment of interest received by FC1 in
the example if instead of making the
loan to FC2, FC1 made the loan to the
foreign parent of the group and with the
purposes of the anti-abuse rules set forth
in section 7(d) of Notice 2007–9 and
§ 1.954–1(f)(2)(iv).
Comments are requested as to
whether, and if so, to what extent, the
section 954(c)(6) exception should be
available in cases in which a related
foreign payor corporation (that is a CFC
solely as a result of downward
attribution) has section 958(a) U.S.
shareholders and therefore is partially
under U.S. taxing jurisdiction.
III. Applicability Dates
The regulations under section 367(a)
are proposed to apply to transfers made
on or after September 21, 2020.
Subject to special rules for certain
entity classification elections and
changes in taxable years, the regulations
under section 954(c)(6) are proposed to
apply to payments or accruals of
dividends, interest, rents, and royalties
made by a foreign corporation during
taxable years of the foreign corporation
ending on or after September 21, 2020,
and to taxable years of United States
shareholders in which or with which
such taxable years of the foreign
corporation end.
The proposed regulations further
provide that taxpayers may choose to
apply the rules under section 367 or
954(c)(6), once filed as final regulations
in the Federal Register, to the last
taxable year of a foreign corporation
beginning before January 1, 2018, and
each subsequent taxable year of the
foreign corporation, subject to a
consistency requirement. See section
7805(b)(7).
Finally, a taxpayer may rely on the
proposed regulations under section 367
or 954(c)(6) with respect to any taxable
year before the date that these
regulations are published as final
regulations in the Federal Register,
provided that the taxpayer and persons
that are related (within the meaning of
section 267 or 707) to the taxpayer
consistently rely on the proposed
regulations under section 367 or
954(c)(6), respectively, with respect to
all foreign corporations.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, notices, and other guidance
cited in this document are published in
the Internal Revenue Bulletin and are
available from the Superintendent of
Documents, U.S. Government
Publishing Office, Washington, DC
20402, or by visiting the IRS website at
http://www.irs.gov.
Special Analyses
These proposed regulations are not
subject to review under section 6(b) of
Executive Order 12866 pursuant to the
Memorandum of Agreement (April 11,
2018) between the Treasury Department
and the Office of Management and
Budget regarding review of tax
regulations.
It is hereby certified that these
proposed regulations will not have a
significant economic impact on a
substantial number of small entities
within the meaning of section 601(6) of
the Regulatory Flexibility Act (5 U.S.C.
chapter 6). The proposed regulations are
intended to ensure that certain rules
under sections 367(a) and 954(c)(6)
apply in the same manner in which they
applied before the repeal of section
958(b)(4). The proposed regulations do
not impose any new costs on taxpayers.
Consequently, the Treasury Department
and the IRS have determined that the
proposed regulations will not have a
significant economic impact on a
substantial number of small entities.
Notwithstanding this certification, the
Treasury Department and the IRS invite
comments on the impacts of these rules
on small entities.
Pursuant to section 7805(f), this
notice of proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business. The Treasury
Department and the IRS request
comments on the impact of these
proposed regulations on small business
entities.
Comments and Requests for a Public
Hearing
Before these proposed amendments to
the regulations are adopted as final
regulations, consideration will be given
to comments that are submitted timely
to the IRS as prescribed in the preamble
under the
ADDRESSES
section. The
Treasury Department and the IRS
request comments on all aspects of the
proposed regulations. Any electronic
comments submitted, and to the extent
practicable any paper comments
submitted, will be made available at
www.regulations.gov or upon request.
As noted in the preamble to the 2019
proposed regulations, the Treasury
Department and the IRS intend to
update the regulations under section
267 to take into account the changes
made to that section by Public Law 108–
357 in future guidance. The Treasury
Department and the IRS also intend to
update the regulations under section
163(e) to take into account the changes
made to that section by Public Law 108–
357 in future guidance. The Treasury
Department and the IRS request
comments on the appropriate scope of
such guidance.
A public hearing will be scheduled if
requested in writing by any person who
timely submits electronic or written
comments. Requests for a public hearing
are also encouraged to be made
electronically. If a public hearing is
scheduled, notice of the date and time
for the public hearing will be published
in the Federal Register. Announcement
2020–4, 2020–17 IRB 1, provides that
until further notice, public hearings
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conducted by the IRS will be held
telephonically. Any telephonic hearing
will be made accessible to people with
disabilities.
Drafting Information
The principal authors of the proposed
regulations are Karen J. Cate, Christina
G. Daniels, and Lynlee C. Baker of the
Office of Associate Chief Counsel
(International). However, other
personnel from the Treasury
Department and the IRS participated in
the development of the proposed
regulations.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
■Paragraph 1. The authority citation
for part 1 is amended by adding an entry
for § 1.954(c)(6)–2 in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
Section 1.954(c)(6)–2 issued under 26 U.S.C.
954(c)(6)(A).
* * * * *
■Par. 2. Section 1.367(a)–3 is amended
by revising paragraph (c)(4)(iv) and
adding two sentences at the end of
paragraph (c)(11)(ii) to read as follows:
§ 1.367(a)–3 Treatment of transfers of
stock or securities to foreign corporations.
* * * * *
(c) * * *
(4) * * *
(iv) Attribution rule. Except as
otherwise provided in this section, the
rules of section 318, as modified by the
rules of section 958(b) but without
applying section 318(a)(3)(A), (B), and
(C) so as to consider a U.S. person as
owning stock which is owned by a
person who is not a U.S. person, apply
for purposes of determining the
ownership or receipt of stock, securities,
or other property under this paragraph.
For purposes of determining whether a
U.S. person is a five-percent transferee
shareholder under paragraph (c)(1)(iii)
of this section, however, the rules of
section 318, as modified by the rules of
section 958(b) (taking into account
section 318(a)(3)(A), (B), and (C) so as to
consider a U.S. person as owning stock
which is owned by a person who is not
a U.S. person), apply.
* * * * *
(11) * * *
(ii) * * * Paragraph (c)(4)(iv) of this
section applies to transfers occurring on
or after September 21, 2020. For
transfers occurring before September 21,
2020, a taxpayer may apply paragraph
(c)(4)(iv) of this section to transfers
occurring during the last taxable year of
a foreign corporation beginning before
January 1, 2018, and each subsequent
taxable year of the foreign corporation,
provided that the taxpayer and persons
that are related (within the meaning of
section 267 or 707) to the taxpayer
consistently apply this paragraph with
respect to all transfers to all foreign
corporations.
* * * * *
■Par. 3. Section 1.954(c)(6)–2 is added
to read as follows:
§ 1.954(c)(6)–2 Definition of controlled
foreign corporation for purposes of section
954(c)(6).
(a) Controlled foreign corporation. For
purposes of section 954(c)(6), the term
controlled foreign corporation has the
meaning given such term by section 957
(taking into account the special rule for
certain captive insurance companies
contained in section 953(c)), determined
without applying section 318(a)(3)(A),
(B), and (C) so as to consider a United
States person as owning stock which is
owned by a person who is not a United
States person.
(b) Applicability dates—(1) In general.
Except as provided in paragraph (b)(2)
of this section, this section applies to
payments or accruals of dividends,
interest, rents, and royalties made by a
foreign corporation during taxable years
of the foreign corporation ending on or
after September 21, 2020, and taxable
years of United States shareholders in
which or with which such taxable years
of the foreign corporation end. This
section also applies to taxable years of
a foreign corporation ending before
September 21, 2020, and taxable years
of United States shareholders in which
or with which such taxable years of the
foreign corporation end, resulting from
an entity classification election made
under § 301.7701–3 of this chapter, or
resulting from a change in taxable year
under section 898, with respect to the
foreign corporation that was effective on
or before September 21, 2020, but was
filed on or after September 21, 2020.
(2) Special rule. A taxpayer may apply
this section to the last taxable year of a
foreign corporation beginning before
January 1, 2018, and each subsequent
taxable year of the foreign corporation
ending before September 21, 2020, and
to taxable years of United States
shareholders in which or with which
such taxable years of the foreign
corporation end, provided that the
taxpayer and persons that are related
(within the meaning of section 267 or
707) to the taxpayer consistently apply
this section with respect to all foreign
corporations.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
[FR Doc. 2020–17550 Filed 9–21–20; 8:45 am]
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that you consider to be confidential or
inappropriate for public disclosure.
You may inspect and photocopy all
written comments, by appointment
only, at USPS
®
Headquarters Library,
475 L’Enfant Plaza SW, 11th Floor
North, Washington, DC 20260. These
records are available for review on
Monday through Friday, 9 a.m.–4 p.m.,
by calling 202–268–2906.
FOR FURTHER INFORMATION CONTACT
:
James Wilson at (901) 681–4600, Kai
Fisher at (901) 681–4634, or Garry
Rodriguez at (202) 268–7281.
SUPPLEMENTARY INFORMATION
:
Background
Currently, DMM section 602.6.0, ZIP
Code Accuracy Standards, provides that
a ZIP Code may be used on a mail piece
within 12 months after verified by the
use of an approved method. Once a ZIP
Code is used on a mailpiece, the same
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