Final and proposed regulations on the repeal of Section 958(b)(4) by the Tax Cuts and Jobs Act (“TCJA”)

The Internal Revenue Service (“IRS”) released final regulations (T.D. 9908) interpreting the TCJA’s modification of section 958(b). The TCJA had broadened the category of foreign corporations that may qualify as a controlled foreign corporation through attributed ownership (generally known as downward attribution).

These regulations mostly adopt, with minor changes, proposed regulations (REG-104223-18) issued in October 2019. The final regulations generally apply after September 30, 2019, although, for the most part, taxpayers may apply the final rules to the last tax year (and each subsequent tax year) of a foreign corporation beginning before January 1, 2018 and to tax years of US shareholders in which those tax years of the foreign corporation end.

Together with the final regulations, the Internal Revenue Service (“IRS”) released proposed regulations under section 954(c)(6) intended to ensure that the operation of section 954(c)(6) is consistent with its application before the Act’s repeal of section 958(b)(4).


As a result of the repeal of section 958(b)(4) in 2017, the constructive ownership rules of section 318 may apply to stock of a foreign corporation owned by a foreign person, treating it as owned by a US person in determining whether the foreign corporation is a controlled foreign corporation (“CFC”) as defined in section 957. The change was intended to address Congress’s concern regarding certain transactions viewed as abusive, especially post-inversion structuring transactions undertaken in order to limit inclusion into US taxable income from pre-inversion CFCs.

However, the consequences of this modification are significantly broader, impacting structures where foreign corporations are owned primarily by foreign shareholders and US ownership is solely by attribution. The results have substantive implications and create additional reporting obligations for foreign corporations with attributed US ownership.

To address some of the arguably unanticipated consequences that the repeal of section 958(b)(4) has on other areas of the Code, the IRS published proposed regulations in October 2019, along with Revenue Procedure 2019-40, 2019-43 I.R.B. 982. The final regulations mostly adopt the proposed regulations, which generally modify regulations interpreting other Code sections to provide that those rules would apply consistent with their application before the repeal of section 958(b)(4).

Turning Off Section 958(b)(4)

The proposed and final regulations mitigate the impact of the repeal of section 958(b)(4) as relevant to the following areas:

  • The application of the matching rules of section 267(a) to payments to CFCs;
  • Treating space and ocean income and international communications income of a foreign corporation as foreign source income regardless of whether the foreign corporation qualifies as a CFC by reason of downward attribution;
  • Modifying the definition of a CFC for the purpose of determining whether a foreign corporation qualifies as a passive foreign investment corporation under the asset test of section 1297(e) by disregarding downward attribution from foreign persons; and
  • Modifying information reporting rules under chapter 61 for Form 1099 reporting required by foreign corporation to provide that a U.S. payor for this purpose includes only a CFC that is a CFC without regard to downward attribution.

The regulations also ensure that the repeal of section 958(b)(4) does not create addition planning opportunities by amending regulations in the following areas:

  • With regard to liquidations of a domestic company into a foreign corporation under section 332(d)(3), providing that the definition of a CFC prior to repeal of section 958(b)(4) will apply;
  • In connection with whether the requirements to avoid triggering a gain recognition agreement have been met under Reg. §1.367(a)-8(k)(14), providing that a US transferor is considered to retain a 5% interest in the stock only where that ownership does not exist solely as a result of the repeal of section 958(b)(4);
  • As applied to the grantor trust rules under section 672(f), to provide that only CFCs that are treated as CFCs without regard to downward attribution are taken into account for this purpose;
  • For purposes of the determination of a partnership’s tax year under section 706, treating a CFC as a US partner only in circumstances in which a US shareholder owns stock in the foreign partner within the meaning of section 958(a); and
  • Applying the section 904 look-through rules to limit the application of the active rents and royalties exception and the CFC look-through rule to US shareholders that are US shareholders without regard to downward attribution.

The proposed regulations

In proposed regulations (REG-110059-20) issued concurrently with the final regulations, the IRS extended the rules that would turn off section 958(b)(4) to two other areas:

  • In connection with the requirements for qualifying for tax-free treatment upon the transfer of stock of a domestic corporation to a foreign corporation under section 367(a) and Reg. § 1.367(a)-3(c), providing that in some cases a US person’s constructive ownership interest should not include an interest treated as owned as a result of downward attribution from a foreign person; and
  • In connection with qualifying for the look-through exception to subpart F of section 954(c)(6), providing that the exception will only apply to amounts received or accrued from foreign corporations that are CFCs, carving out certain of the constructive ownership rules of section 318(a)(3) that otherwise would treat a US person as owning stock that is owned by a foreign person.

Mazars’ Insight
The fact that the attribution rules of section 958(b) apply differently with respect to different Code sections will require taxpayers to be mindful of determining precisely which definition is relevant in interpreting the various provisions of the Code that define CFCs.

Please contact your Mazars USA LLP professional for additional information.

This alert was produced in conjunction with Ivins, Phillips & Barker, Chtd.

Published on January 27, 2021

The information provided here is for general guidance only, and does not constitute the provision of tax advice, accounting services, investment advice, legal advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers.