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Controlled Foreign Corporation Regulations Under TCJA

10/15/2018

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The IRS has issued proposed regulations affecting controlled foreign corporations (CFCs) to implement parts of the Tax Cuts and Jobs Act (TCJA). The regulations concern global intangible low-taxed income generated by CFCs. 

New subpart F ownership rules make it easier for foreign corporations like PFICs to become CFCs. When a PFIC becomes a CFC the shareholders have to choose whether to elect out of PFIC status or be subject to CFC and PFIC rules simultaneously. A PFIC’s new status as a CFC causes it to be subject to the new TCJA rules that apply only to CFC foreign corporations. Therefore, the new PFIC rules themselves make it more difficult for insurance companies to avoid PFIC status. For more details, read Tax Notes blog, "When a PFIC Becomes a Controlled Foreign Corporation." 

Under the TCJA, a U.S. person, domestic corporation, partnership, trust or estate that owns at least 10 percent of the value or voting rights in one or more CFCs will be required to include this income as currently taxable income. That’s regardless of whether any amount is distributed to the shareholder. 

The TCJA requires that, for the last tax year beginning before Jan. 1, 2018, any U.S. shareholder of a CFC must include in income its pro rata share of the accumulated post-1986 E&P; the Subpart F income of the foreign corporation is increased by the greater of the accumulated post-1986 deferred E&P of the corporation, determined as of Nov. 2, 2017, or as of Dec. 31, 2017 (measurement dates) (Sec. 965(a)). Sec. 965(c) allows a dividends-received deduction against this repatriation inclusion, resulting in the application of a 15.5% rate to earnings held in cash (or cash equivalents) and an 8% rate to earnings held in noncash assets. For more in-depth information, read "Tax reform: Individual taxpayers and the Sec. 962 election" from The Tax Adviser.

LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.