The IRS recently granted relief to certain U.S. persons who own stock in certain foreign corporations affected by the repeal of Internal Revenue Code Section 958(b)(4) under the Tax Cuts and Jobs Act. Revenue Procedure 2019-40 limits the inquiries that U.S. persons must make to determine whether certain foreign corporations are controlled foreign corporations (CFCs).
It also allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and Global Intangible Low-Taxed Income (GILTI) inclusions, as well as to satisfy CFC reporting requirements if more detailed information is unavailable. Let’s look at some highlights of the relief.
Safe harbor for determining CFC status
The IRS will now accept a U.S. person’s determination that a foreign corporation doesn’t meet the Sec. 957 ownership requirements and, therefore, isn’t a CFC with respect to that person, under certain conditions. This safe harbor doesn’t apply to a foreign corporation that’s a U.S.-controlled CFC.
To qualify for the safe harbor, the U.S. person cannot have actual knowledge, statements received and/or enough reliable publicly available information to determine that the Sec. 957 ownership requirements are met. For this purpose, the term “Sec. 957 ownership requirements” means, with respect to a foreign corporation and any given day of a taxable year of the foreign corporation, stock ownership that would cause the foreign corporation to be a CFC on such day.
If the U.S. person directly owns stock of, or an interest in, a foreign entity (top-tier entity), the U.S. person inquires of the top-tier entity:
- Whether it meets the CFC stock ownership requirements,
- Whether, how, and to what extent such top-tier entity directly or indirectly owns stock of one or more foreign corporations, and
- Whether, how, and to what extent such top-tier entity owns directly or indirectly stock of, or an interest in, one or more domestic entities.
General safe harbor for using alternative information
The IRS will accept the use of alternative information by a taxpayer if information satisfying the current requirements isn’t readily available to a U.S. shareholder with respect to the foreign controlled CFC.
Thus, a subpart F inclusion amount, a GILTI inclusion amount or an amount in a record required to be maintained under Sec. 964(c) and applicable regs may be determined by the U.S. shareholder based on alternative information with respect to the foreign-controlled CFC.
Safe harbor for using alternative information for determining amounts subject to transition tax
The IRS will accept the use of alternative information in the case of an SFC, other than either a foreign-controlled CFC with respect to which there’s a related U.S. shareholder or a U.S.-controlled CFC, if information satisfying the current requirements isn’t readily available to an unrelated U.S. shareholder with respect to the SFC.
Thus, a U.S. shareholder may determine a transition tax amount based on alternative information with respect to the SFC, provided the U.S. shareholder reports such amount on a return both due and filed before or after October 1, 2019.
Penalties under Sec. 6038 and Sec. 6662 not applicable
The IRS won’t impose penalties under Sec. 6038 or Sec. 6662 to the extent such penalties would apply to a U.S. person determining:
- That a foreign corporation doesn’t meet the CFC ownership requirements consistent with Sec. 4.02 of this Revenue Procedure,
- A subpart F inclusion amount or GILTI inclusion amount, an amount in a record required to be maintained under Sec. 964(c) and applicable regs, or an amount reported on a Form 5471 based on alternative information consistent with Sec. 5.02 of this Revenue Procedure, or
- A transition tax amount based on alternative information consistent with Sec. 6.02 of this Revenue Procedure.
Form 5471 filing requirements
The IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of a CFC are required to provide. It will also limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely because of downward attribution from another person.
Unless otherwise provided in future guidance, taxpayers may apply Secs. 4, 5, 6 and 7 of this Revenue Procedure with respect to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of such foreign corporation. Taxpayers may also apply them with respect to the taxable years of U.S. shareholders in which or with which such taxable years of such foreign corporation end.
Taxpayers may apply the rules described in Secs. 5, 6 and 8 of this procedure, before the instructions to Form 5471 are modified, for the last taxable year of a foreign corporation beginning before January 1, 2018. They may also apply such rules to each subsequent taxable year of the foreign corporation, and with respect to the taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporation end.
This relief will come as welcome news to those who hold stock in the foreign corporations in question. If you’re among them, contact your Elliott Davis Advisor for assistance in determining how the changes affect your tax situation.