IRS Issues Final Transition Tax Regs

IRS Issues Final Transition Tax Regs

Internal Revenue Service

The IRS has issued final regulations (T.D. 9846) implementing section 965, which levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. The final regs retain the basic approach and structure of the proposed regs (<a href="/lr/resolve//289nm">REG-104226-18</a>) issued in August but with some changes. The regs provide additional guidance and rules related to <a href="/research/federal/usc26/965" resolve="/lr/resolve/965/cnmx" title="965">section 965</a> that are described in four notices (<a href="/lr/resolve//22w23">Notice 2018-7</a>, <a href="/lr/resolve//26t24">Notice 2018-13</a>, <a href="/lr/resolve//27xpp">Notice 2018-26</a>, and <a href="/lr/resolve//28gv6">Notice 2018-78</a>) issued since December 22, 2017. Specifically, the guidance outlines rules on the determination and treatment of <a href="/research/federal/usc26/965#cnmx-0000300" resolve="/lr/resolve/965c/cnmx#cnmx-0000300" title="965(c)">section 965(c)</a> deductions, rules that disregard some transactions in connection with section 965, and rules related to foreign tax credits, elections and payments, and the application of the regs to affiliated groups, including consolidated groups. Among topics addressed in the final regs is the determination of “aggregate foreign cash position” and “cash position.” Treasury and the IRS determined that a narrow exemption from the definition of cash position is appropriate for some assets held by a specified foreign corporation in the ordinary course of its trade or business and for some privately negotiated contracts to buy or sell the assets. Treasury and the IRS did not adopt recommendations for additional cash position exceptions. Proposed reg. section 1.965-3 provides rules on the determination of section 965(c) deductions and section 965(c) deduction amounts. The final regs amend the rule in proposed reg. section 1.965-3(b)(2) to clarify that double-counting relief regarding a specified foreign corporation is available when an amount is taken into account in determining the <a href="/research/federal/usc26/958#cpcf-0000002" resolve="/lr/resolve/958a/cpcf#cpcf-0000002" title="958(a)">section 958(a)</a> U.S. shareholder’s pro rata share of the cash position of another specified foreign corporation on the other specified foreign corporation’s corresponding cash measurement date. The regs’ antiabuse rules relate to transactions that have a principal purpose of changing a section 965 element of a U.S. shareholder and some changes in method of accounting and entity classification elections. To mitigate double taxation that could result from the application of the antiabuse rules to a liquidation, the final regs provide that the date of the liquidation generally is treated as the last day of the tax year of the specified foreign corporation. Special rules apply for liquidations resulting from entity classification elections, including a rule that may defer the date of liquidation to the date on which the entity classification election is filed. The final regs also provide an exception from the antiabuse rules for some incorporation transactions. Addressing the application of attribution rules for determining the status of a foreign corporation as a specified foreign corporation, the preamble states that downward attribution of stock to a trust from de minimis beneficiaries of the trust presents similar administrative and compliance difficulties to those addressed in the proposed regs. Accordingly, the final regs extend the special rules concerning downward attribution to trusts. The final regs increase from 5 percent to 10 percent the threshold for application of the special attribution rules for partnerships and similarly use a 10 percent threshold for the newly added special attribution rule for trusts. The final regs also address the ordering rule on adjustments to earnings and profits for determining a section 958(a) U.S. shareholder’s inclusions under section 951(a)(1) and the treatment of distributions under section 959. Treasury and the IRS determined that the ordering rule’s limited application to E&amp;P for a specified foreign corporation’s last tax year beginning before January 1, 2018, is too narrow. Thus, the final regs provide that the ordering rule applies for the tax year of a specified foreign corporation in which an E&amp;P measurement date occurs and for the last tax year of a specified foreign corporation that begins before January 1, 2018. The final regs revise the definition of “controlled domestic partnership” to not be defined only with respect to a U.S. shareholder so that a controlled domestic partnership is clearly treated as a foreign partnership for all partners if the controlled domestic partnership rule applies. The final regs also provide that a controlled domestic partnership treated as a foreign partnership is treated as a foreign passthrough entity. The final regs retain the applicability dates that were in the proposed regulations and, consistent with the applicability date of section 965, generally apply beginning the last tax year of a foreign corporation that begins before January 1, 2018, and regarding a U.S. person, beginning the tax year in which or with which the tax year of the foreign corporation ends.

Corrected by <a href="/lr/resolve//29bwt">T.D. 9846 amendment</a> and <a href="/lr/resolve//29bws">T.D. 9846 correction</a>.

(1) At 84 FR 14260-14261, April 10, 2019, the IRS made <a href="/lr/resolve/corrections/29bwt" id="2920s-0003451" title="corrections">corrections</a> to the following Treasury Decision and the changes have been incorporated in the associated regulations. (2) At 84 FR 14261-14262, April 10, 2019, the IRS made a <a href="/lr/resolve/correction/29bws" id="2920s-0003445" title="correction">correction</a> to the following Treasury Decision and the changes have been incorporated below.

The IRS has issued final regulations (T.D. 9846) implementing section 965, which levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. The final regs retain the basic approach and structure of the proposed regs (REG-104226-18) issued in August but with some changes.

The IRS has issued final regulations (T.D. 9846) implementing section 965, which levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders by deeming those earnings to be repatriated. The final regs retain the basic approach and structure of the proposed regs (REG-104226-18) issued in August but with some changes. The regs provide additional guidance and rules related to section 965 that are described in four notices (Notice 2018-7, Notice 2018-13, Notice 2018-26, and Notice 2018-78) issued since December 22, 2017. Specifically, the guidance outlines rules on the determination and treatment of section 965(c) deductions, rules that disregard some transactions in connection with section 965, and rules related to foreign tax credits, elections and payments, and the application of the regs to affiliated groups, including consolidated groups. Among topics addressed in the final regs is the determination of “aggregate foreign cash position” and “cash position.” Treasury and the IRS determined that a narrow exemption from the definition of cash position is appropriate for some assets held by a specified foreign corporation in the ordinary course of its trade or business and for some privately negotiated contracts to buy or sell the assets. Treasury and the IRS did not adopt recommendations for additional cash position exceptions. Proposed reg. section 1.965-3 provides rules on the determination of section 965(c) deductions and section 965(c) deduction amounts. The final regs amend the rule in proposed reg. section 1.965-3(b)(2) to clarify that double-counting relief regarding a specified foreign corporation is available when an amount is taken into account in determining the section 958(a) U.S. shareholder’s pro rata share of the cash position of another specified foreign corporation on the other specified foreign corporation’s corresponding cash measurement date. The regs’ antiabuse rules relate to transactions that have a principal purpose of changing a section 965 element of a U.S. shareholder and some changes in method of accounting and entity classification elections. To mitigate double taxation that could result from the application of the antiabuse rules to a liquidation, the final regs provide that the date of the liquidation generally is treated as the last day of the tax year of the specified foreign corporation. Special rules apply for liquidations resulting from entity classification elections, including a rule that may defer the date of liquidation to the date on which the entity classification election is filed. The final regs also provide an exception from the antiabuse rules for some incorporation transactions. Addressing the application of attribution rules for determining the status of a foreign corporation as a specified foreign corporation, the preamble states that downward attribution of stock to a trust from de minimis beneficiaries of the trust presents similar administrative and compliance difficulties to those addressed in the proposed regs. Accordingly, the final regs extend the special rules concerning downward attribution to trusts. The final regs increase from 5 percent to 10 percent the threshold for application of the special attribution rules for partnerships and similarly use a 10 percent threshold for the newly added special attribution rule for trusts. The final regs also address the ordering rule on adjustments to earnings and profits for determining a section 958(a) U.S. shareholder’s inclusions under section 951(a)(1) and the treatment of distributions under section 959. Treasury and the IRS determined that the ordering rule’s limited application to E&P for a specified foreign corporation’s last tax year beginning before January 1, 2018, is too narrow. Thus, the final regs provide that the ordering rule applies for the tax year of a specified foreign corporation in which an E&P measurement date occurs and for the last tax year of a specified foreign corporation that begins before January 1, 2018. The final regs revise the definition of “controlled domestic partnership” to not be defined only with respect to a U.S. shareholder so that a controlled domestic partnership is clearly treated as a foreign partnership for all partners if the controlled domestic partnership rule applies. The final regs also provide that a controlled domestic partnership treated as a foreign partnership is treated as a foreign passthrough entity. The final regs retain the applicability dates that were in the proposed regulations and, consistent with the applicability date of section 965, generally apply beginning the last tax year of a foreign corporation that begins before January 1, 2018, and regarding a U.S. person, beginning the tax year in which or with which the tax year of the foreign corporation ends.

Sec. 965 Treatment of deferred foreign income upon transition to participation exemption system of taxation

Sec. 62 Adjusted gross income defined

Sec. 962 Election by individuals to be subject to tax at corporate rates

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IRS Issues Final Transition Tax Regs