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US: Proposed 956 regulations would limit foreign tax credit planning by reducing Section 956 inclusions for corporate US shareholders

On 31 October 2018, the United States (US) Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations under Internal Revenue Code1 Section 956 (the Proposed 956 Regulations) that would, in certain cases, reduce an inclusion under Section 956 (a Section 956 inclusion) to corporate US shareholders of certain controlled foreign corporations (a CFC). In general, the reduction to the Section 956 inclusion equals the amount of the deduction under Section 245A (a Section 245A deduction) that the corporate US shareholder would have been allowed if the CFC had distributed to the corporate US shareholder an amount equal to the potential Section 956 inclusion. Rules are provided to address indirectly-owned CFCs. The Proposed 956 Regulations do not apply to non-corporate US shareholders.

The Proposed 956 Regulations apply to tax years of a CFC beginning on or after the date final regulations are published in the Federal Register. Taxpayers may, however, rely on the Proposed 956 Regulations for tax years of a CFC beginning after 31 December 2017, and before the date final regulations are published, provided that the taxpayer and its related US persons consistently apply the Proposed 956 Regulations to all of their CFCs.


A “US shareholder” (whether or not a corporation) of a CFC generally must include in gross income an amount determined under Section 956. This “Section 956 amount” generally corresponds to the amount of “United States property” held by a CFC but only to the extent of “applicable” earnings — an amount that thereby is deemed to have been repatriated. In connection with the inclusion, a corporate US shareholder is deemed to have paid (and generally may take as a credit against its US federal income tax liability) certain foreign income taxes actually paid by the CFC and properly attributable to the Section 956 inclusion.

Section 245A allows domestic corporations a deduction upon receipt of an eligible dividend from a qualifying foreign corporation. In general, a domestic corporation may not claim a credit for taxes paid or accrued with respect to a dividend for which a deduction is allowed under Section 245A.

Detailed discussion of Proposed 956 Regulations

Reduction of inclusion under Section 956

In general

The Proposed 956 Regulations reduce a corporate US shareholder’s Section 956 amount when a hypothetical distribution from the CFC would have resulted in a dividend eligible for a deduction under Section 245A. Determination of the reduction is made on a share-by-share (of the CFC) basis and encompasses two steps.

First, the “tentative Section 956 amount” for each share that the corporate US shareholder owns (within the meaning of Section 958(a)) in the CFC is determined under existing rules.

Second, the tentative Section 956 amount is reduced by the amount of the Section 245A deduction that the corporate US shareholder would be allowed based on a “hypothetical distribution” of an amount equal to the “tentative Section 956 amount” from the CFC for each share.

Although neither expressly noted in the Proposed 956 Regulations nor in the preamble, the Proposed 956 Regulations will likely hinder taxpayers’ ability to affirmatively use Section 956 to repatriate earnings with foreign taxes properly attributable to such earnings.

Indirect ownership rules

The Proposed 956 Regulations describe rules applicable when a US shareholder owns shares of the CFC indirectly (within the meaning of Section 958(a)(2)). Unless the hypothetical distribution is subject to Section 245A(e) — which provides special rules for “hybrid dividends,” the hypothetical distribution is generally treated for purposes of Sections 245A, 246(a) and 959 as if the corporate US shareholder directly owned the CFC.

To determine if the hypothetical distribution is considered a “hybrid dividend” (within the meaning of Section 245A(e)), the distribution is treated as if it were made to the US shareholder through each intermediary entity. To the extent Section 245A(e)(2) would apply, then the US shareholder is treated as not being allowed a deduction under Section 245A by reason of the hypothetical distribution.

Applicable to corporate US shareholder

The Proposed 956 Regulations apply solely to domestic corporations. As explained in the preamble, US individuals do not qualify for the dividend received deduction of Section 245A, even if a Section 962 election to treat an individual as a corporation for purposes of Sections 951(a) and 960 is made. The preamble requests comments on US partnerships that are US shareholders of CFCs.

Authority and request for comments

The preamble states that the Proposed 956 Regulations are issued under the authority of Sections 7805, 245A(g) and 956(e). More specifically, Section 956(e) grants the Secretary authority to ensure that the application of Section 956 is consistent with its purposes, including establishing symmetrical treatment between actual dividends and other effective repatriations. The preamble cites other instances in which Treasury and the IRS have exercised such authority to ensure that the application of Section 956 is consistent with its purposes. In all those instances, however, the authority has been used to exclude certain property from the definition of US property in Section 956(c).

In addition to requesting comments on the application of the proposed rules to domestic partnerships, the preamble requests comments on the maintenance of previously taxed earnings and profits (PTI) accounts under Section 959, basis adjustments under Section 961, and the interaction of the Proposed 956 Regulations with Section 245A(e) (relating to hybrid dividends).


The Proposed 956 Regulations would allow corporate US shareholders to access cash held by their CFCs more easily in certain fact patterns that would have otherwise resulted in Section 956 inclusions, which are subject to tax at the 21% corporate rate. Allowing taxpayers to currently rely on the Proposed 965 Regulations is also a welcome benefit. The Proposed 956 Regulations are not so welcome news, however, for those taxpayers seeking to affirmatively trigger Section 956 inclusion to access creditable foreign taxes paid by their CFCs, although such planning may still be possible in certain cases because the proposed regulations do not eliminate Section 956 inclusions in all cases.

Additionally, the Proposed 956 Regulations largely minimize the effect of Section 956 on common cross-border financial transactions, including US group borrowings from CFCs, and CFC credit support of US third-party borrowings through CFC guarantees/pledges of CFC stock. As a result of the Proposed 956 Regulations, US borrowers may seek to obtain interest rate reductions on existing third-party borrowings by pledging all of their CFC stock or issuing CFC guarantees, or increase liquidity available within existing cash pool structures by adding CFC participants to the arrangement, practices taxpayers generally avoided before the issuance of the Proposed Regulations. Taxpayers must, however, consider any collateral US tax effects before modifying any existing arrangements, including the potential application of Sections 59A (BEAT), 267A (anti-hybrid), and Treas. Reg. Section 1.1001-3, as well as any implications such changes may have on the taxpayer’s GILTI profile, foreign currency risk management, and withholding tax considerations.


1. All “Section” references are to the Internal Revenue Code of 1986, and the regulations promulgated thereunder.


EYG no. 011669-18Gbl

Download this Tax Alert as a PDF file.

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