IRS Releases Final Regulations: Controlled Foreign Corporation Ownership Attribution

On November 19, 2019, the IRS released final regulations, limiting Internal Revenue Code (IRC) Section 318(a)(3) constructive ownership rules, as they apply to determining whether a foreign corporation is a controlled foreign corporation.

The rules define related persons under IRC Section 954(d)(3) for certain controlled foreign corporations (CFCs) and are intended to avoid inappropriately treating entities, including CFCs, as related persons for US tax purposes if they don’t have significant relationships to each other.


The IRS’s decision to limit the application of the downward-attribution rules was driven by an overly inclusive situation created by the 2017 tax reform reconciliation act, commonly referred to as the Tax Cuts and Jobs Act (TCJA).

During the last taxable year, some US taxpayers found that they became US shareholders of CFCs through the downward-attribution rules and, consequently, were subject to additional transition tax under IRC Section 965 and Global Intangible Low-Taxed Income (GILTI) under IRC  Section 951A. The final regulations apply to limit this effect.

Downward-Attribution Limitation

Historically, stock owned by an entity could be attributed to equity owners on a pro rata basis, and stock owned by equity owners could be attributed to the entity—forming the upward and downward attribution framework under IRC Section 318.

IRC Section 958(b)(4) provided some relief for purposes of Section 958, stating that Section 318 wasn’t applicable when attributing stock owned by a foreign person to a US person. However, after the TCJA repealed Section 958(b)(4), the floodgates opened. Foreign corporation stock owned by a foreign person became attributable to a US person if the US person was also a US shareholder in the CFC. A US shareholder is a person who directly, indirectly, or through attribution, owns at least 10% in a foreign corporation.

This unintentional repeal wasn’t taken lightly by taxpayers, who commented on the results and recommended that the IRS remedy the situation.

Final Regulations

In response to taxpayers’ concerns, the final regulations provide that IRC Section 318(a)(3) and US Treasury Regulation Section 1.958-2(d) don’t apply for attributing stock or other interest to:

  • Corporations
  • Partnerships
  • Estates
  • Trusts

Additionally, IRC Section 318(a)(4) and US Treasury Regulation Section 1.958-2(e) also don’t apply for treating dividends, interest, rents, or royalties received or accrued from a foreign corporation as received or accrued from a CFC as a related person. If a person has the option to acquire stock, equity interest, or an interest similar to owning the stock or interest, they should be treated as not owning the interest for the purpose of treating a CFC as a related person.

Impacts for Owners

Final regulations provide that stock in a CFC owned by a foreign-equity owner won’t be attributed to a US shareholder in the same CFC due to downward-attribution rules. This should provide relief to multinational taxpayers.

The final regulations impact US taxpayers who own stock in CFCs and may have previously been considered to own other CFCs through the constructive ownership rules.

Effective Dates

The final regulations are effective as of November 19, 2019.

We’re Here to Help

In preparation for the upcoming tax-filing season, taxpayers may benefit from considering the application of limited-constructive ownership rules when determining if they’re related to certain CFCs. To learn more about how these final regulations may impact you or your company, contact your Moss Adams professional.

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