[Federal Register Volume 85, Number 184 (Tuesday, September 22, 2020)]
[Proposed Rules]
[Pages 59481-59484]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-17550]



[[Page 59481]]

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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.

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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or withdrawn.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 Sec.  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''), 
Sec.  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

[[Page 59482]]

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 Sec.  1.367(a)-
3(c)(5)(iii)); (3) either the United States person is not a five-
percent transferee shareholder (as defined in Sec.  1.367(a)-
3(c)(5)(ii)), or the United States person enters into a gain 
recognition agreement as provided in Sec.  1.367(a)-8; and (4) the 
active trade or business test (as defined in Sec.  1.367(a)-3(c)(3)) is 
satisfied. For purposes of applying these tests, Sec.  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 Sec.  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, 
Sec.  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 Sec.  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 
Sec.  1.367(a)-3(c)(1) can cause a transfer that previously would have 
satisfied the conditions set forth in Sec.  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 Sec.  1.367(a)-3(c)(1) and the attribution rule in Sec.  
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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  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 Sec.  1.367(a)-3(c) other than for 
purposes of determining whether a U.S. person is a five-percent 
transferee shareholder under Sec.  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

[[Page 59483]]

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 Sec.  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

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry for Sec.  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).
* * * * *
0
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:


Sec.  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.
* * * * *
0
Par. 3. Section 1.954(c)(6)-2 is added to read as follows:


Sec.  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 Sec.  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]
BILLING CODE 4830-01-P