Proposed regulations would tie CFC income share to ownership periods
Executive summary
Potential major changes for multinationals and U.S. entities with foreign subs
The Treasury Department and the IRS have proposed regulations implementing changes made by the One Big Beautiful Bill Act (OBBBA) to the rules governing the subpart F income, tested income and tested loss of controlled foreign corporations (CFCs). The proposal would move away from longstanding rules that often focused on ownership on the last day of the taxable year on which the foreign corporation was a CFC and instead would allocate income based on the stock owned by a U.S. shareholder and the portion of the CFC year during which the shareholder owned the stock and was a U.S. shareholder and the foreign corporation was a CFC.
The changes could have significant implications for multinational businesses, private equity-backed groups, closely held international businesses and other U.S. taxpayers with foreign subsidiaries. Companies involved in cross-border acquisitions, dispositions and restructurings should evaluate how the proposed rules could affect transaction economics, reporting obligations and access to post-closing information.
Background: Subpart F income allocation timing
Before the OBBBA amendments, section 951(a)(1)(A) generally required a U.S. shareholder to include its pro rata share of a CFC’s subpart F income only if the shareholder owned CFC stock on the last day of the CFC’s taxable year on which the foreign corporation was a CFC. The shareholder’s pro rata share was determined by reference to a hypothetical distribution under former section 951(a)(2)(A), subject to a reduction for certain dividends under former section 951(a)(2)(B). Section 951A used a corresponding pro rata share framework for tested items, subject to modifications under the global intangible low-taxed income (GILTI) regulations.
The OBBBA amended section 951(a)(1)(A) to apply when a foreign corporation is a CFC at any time during its taxable year and a U.S. shareholder owns stock of the foreign corporation on any day during that CFC year. As a result, a subpart F inclusion would no longer depend solely on whether the shareholder owned stock on the last relevant day. Instead, section 951(a)(2) would attribute subpart F income to the stock owned by the U.S. shareholder and to the portion of the CFC year during which the shareholder owned the stock and was a U.S. shareholder and the foreign corporation was a CFC.
The same framework would extend to section 951A, which the OBBBA revised by replacing GILTI with net CFC tested income (NCTI), for purposes of tested income and tested loss.
On Aug. 25, 2026, the Treasury Department and the IRS released proposed regulations addressing how a U.S. shareholder determines its pro rata share of a CFC’s subpart F income, tested income and tested loss. The proposed regulations implement amendments enacted by the OBBBA and include transition rule guidance that generally follows the framework outlined in Notice 2025-75, issued in December 2025. The proposed regulations were published in the Federal Register on Aug. 26, 2026.
The proposed regulations generally would use a day-count methodology for most changes in CFC stock ownership. See summary table below for comparison.
For a CFC with one class of stock and no change in outstanding shares, a U.S. shareholder’s pro rata share would equal the CFC’s subpart F income multiplied by the shareholder’s stock ownership percentage and by the portion of the CFC year during which the shareholder owned the stock while the shareholder was a U.S. shareholder and the foreign corporation was a CFC. The proposed regulations would extend this framework to section 951A tested income and tested loss.
When a shareholder owns shares for different periods during the CFC year, the proposed regulations would apply the daily proration rule separately to each “CFC year block,” defined as a group of shares within a class of CFC stock owned by a U.S. shareholder for the same period during the CFC year. The shareholder’s pro rata share would equal the sum of the amounts determined for each CFC year block.
Treasury and the IRS considered allowing an interim closing of the CFC's books or special allocations for extraordinary items but declined to adopt those approaches. The preamble explains that subpart F income, tested income and tested loss are annual net amounts determined at the foreign corporation level. As a result, extraordinary items generally are reflected through the daily-proration rules unless the CFC's taxable year closes under the proposed mandatory or elective year-closing rules.
For corporations with more than one class of stock, the proposal would retain a hypothetical distribution approach to allocate subpart F income among stock classes before applying the daily proration rules within each class. The allocation would be based on the amount of allocable earnings and profits that would be distributed to each class in a hypothetical distribution on the last day of the CFC year.
For this purpose, allocable earnings and profits generally would be the greater of these two amounts:
- The CFC’s earnings and profits determined under section 964
- The sum of the CFC’s subpart F income, determined after the application of section 951A(b)(2)(B)(ii) and Treas. Reg. section 1.951A-6(b), and tested income for the CFC year.
The hypothetical distribution takes into account the economic rights and interests of each class of stock, including the terms of the stock, shareholder agreements and, where appropriate, relative fair market values. Actual distributions during the CFC year generally would not affect the hypothetical distribution analysis.
The proposed regulations also include specific rules for disregarding distribution restrictions, redemption rights, liquidation rights and return-of-capital rights, and for addressing certain cumulative preferred stock and dividend arrearages.
For tested loss CFCs, the proposed regulations would generally treat the hypothetical distribution as made solely with respect to common stock but would allocate tested loss to preferred stock when the loss reduces earnings below the amount needed to satisfy accrued but unpaid preferred dividends.
If common stock has no liquidation value at the beginning of the relevant CFC inclusion year and another equity class has a liquidation preference, tested loss would be allocated first to the most junior class with positive liquidation value, and then to the next most junior class to the extent of liquidation value.
Mandatory and elective year-closing rules apply in specified cases
The proposed regulations would require a foreign corporation’s taxable year to close for all purposes of the Internal Revenue Code if a status change occurs. A status change event would occur when a foreign corporation becomes or ceases to be a CFC, and the taxable year would close at the end of the day on which the status change event occurs.
The proposal also would allow the controlling section 958(a) U.S. shareholders of a CFC to elect to close the CFC’s taxable year if a significant ownership variance occurs and the CFC’s taxable year does not otherwise close on that date.
In general, a significant ownership variance would occur if all specified transfers pursuant to the same plan during the same default taxable year result in a decrease of more than 50 percentage points, by vote or value, in the percentage of outstanding CFC stock owned by one or more section 958(a) U.S. shareholders, compared to their ownership immediately before the first specified transfer. If multiple specified transfers occur pursuant to the same plan on different dates, the significant ownership variance would occur on the date of the last specified transfer taken into account.
Specified transfers can include sales, exchanges, dispositions, issuances and redemptions of CFC stock, as well as certain transfers or issuances of partnership interests that affect indirect ownership of CFC stock.
The elective closing rule generally would not take into account decreases in ownership to the extent related U.S. persons increase their ownership, and certain section 368(a)(1)(F) reorganizations are disregarded for this purpose. If the election is made, the CFC’s taxable year closes for all shareholders and for all purposes of the Code as of the end of the day on which the significant ownership variance occurs.
The proposed regulations would require an “Elective Section 951 Year-Closing Statement,” a written binding agreement among specified U.S. shareholders, and consistent return positions by all persons owning stock of the CFC. The agreement generally must include the controlling section 958(a) U.S. shareholders and each U.S. shareholder that owned stock on or before the significant ownership variance date.
The agreement generally must include the controlling section 958(a) U.S. shareholders and each U.S. shareholder that owned stock on or before the significant ownership variance date.
If a CFC’s U.S. taxable year closes as a result of a mandatory or elective closing but the foreign taxable year does not close, the proposed regulations would allocate a portion of the foreign income tax that accrues in the following U.S. taxable year to the short year ending on the closing date.
The preamble of the proposed regulations provides an example: If a foreign corporation uses a calendar year for both U.S. and foreign income tax purposes and a mandatory or elective event causes its U.S. taxable year to close on June 30, the corporation will first determine its total foreign taxable income for the full foreign calendar year. If 50% of that income is attributable to the period from Jan. 1 through June 30, then 50% of the foreign income tax would be allocated to the U.S. short taxable year ending June 30, even though the full foreign income tax does not accrue until Dec. 31, during the second U.S. short taxable year.
The proposed regulations provide that the allocation would be based on the portion of the foreign corporation’s taxable income, determined under foreign law, attributable to the pre-closing portion of the foreign taxable year under principles similar to Treas. Reg. section 1.1502-76(b). This allocation rule generally would not apply to withholding taxes describedin section 901(k)(1)(B).
The proposed regulations would not automatically close the taxable year of a partnership merely because a CFC partner experiences a mandatory or elective year closing. As a result, if a partnership taxable year begins before the CFC closing date and ends afterward, the CFC generally would take into account its distributive share for that partnership year in its short taxable year following the closing.
Treasury and the IRS requested comments on whether a mandatory or elective CFC year closing should instead be treated as a deemed disposition of the partnership interest for purposes of section 706. Until that issue is resolved, transactions involving CFCs that own partnership interests may require additional attention to income allocation and post-closing information rights.
Under the proposed regulations, section 956 inclusions under section 951(a)(1)(B) would generally retain the last-day ownership approach, but inclusion timing may change. Any amount required to be included under section 951(a)(1)(B), based on the amount determined under section 956 and subject to section 959(a)(2), would be included in the U.S. shareholder’s taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during that CFC year.
This timing rule may accelerate the year of inclusion relative to former section 951(a)(1)(B), and a mandatory or elective closing of the foreign corporation’s taxable year may affect both the section 956 calculation and the related section 951(a)(1)(B) inclusion.
| Situation | Proposed rule approach | Practical effect |
|---|---|---|
| One class, no share change | Daily proration | Sections 951 and 951A inclusion amount is multiplied by the ownership percentage and by eligible ownership days over the CFC year. |
| Different amounts of same class | Daily proration by CFC year block | Each ownership period is computed separately, then added together. |
| Issuance or redemption during the CFC year | Weighted average share count | Outstanding shares are averaged over the period before the ownership allocation applies. |
| Multiple classes of stock | Hypothetical distribution first, then daily proration within each class | Income is allocated among classes by economic rights, then prorated at the shareholder level. |
| Becomes/ceases to be a CFC | Mandatory year closing | The taxable year closes on the status-change date, affecting both income and foreign tax allocation. |
| Significant ownership variance with election | Elective year closing | If elected, the CFC year closes on the transfer date for all shareholders and all Code purposes. |
| Foreign tax after short-year closing | Foreign income tax allocated between short years | Foreign income tax is split between the short years based on pre-closing foreign taxable income, which may shift FTC timing; withholding taxes are excluded. |
| Section 956 / section 951(a)(1)(B) | Last-relevant-day approach retained, with revised inclusion timing | Ownership on the last relevant day is still required, but the year of inclusion may shift. |
Form 5471 reporting would be expanded
The proposed regulations also would revise Form 5471 information reporting rules under Treas. Reg. section 1.6038-2(f). The revised rules would require information prescribed by Form 5471 or a successor form, which may include reporting related to each class of foreign corporation stock, outstanding shares at the beginning of the annual accounting period, issuances, redemptions and other changes in shares during the period, and direct or indirect ownership changes for specified owners and U.S. shareholders.
Transition rules
The proposed regulations would implement the OBBBA transition rule for certain dividends paid or deemed paid before the revised section 951(a) rules apply, generally adopting the framework in Notice 2025-75. The transition rule would apply to dividends paid or deemed paid on or before June 28, 2025, in the CFC taxable year that includes that date if the relevant U.S. shareholder did not own the stock during the portion of the year ending on June 28, 2025, and to dividends paid or deemed paid after June 28, 2025, and before the CFC’s first taxable year beginning after Dec. 31, 2025. In general, those dividends would not be treated as dividends for purposes of former section 951(a)(2)(B) to the extent they do not increase the taxable income of a U.S. person subject to federal income tax.
For this purpose, taxable income generally would be determined after exclusions and dividends received deductions, including section 245A where applicable, but without regard to generally applicable deductions not particular to the dividend, such as depreciation, net operating losses and certain distributions or dividends paid deductions.
Section 245A and Treas. Reg. section 1.245A-5 would apply before and without regard to the transition rule, so a dividend ineligible for section 245A under those rules could still increase taxable income. The proposal also includes rules for CFC-to-CFC dividends, partnership look-through determinations and a safe harbor for certain de minimis owners of publicly held partnership interests.
A U.S. shareholder claiming a reduction under former section 951(a)(2)(B) for a dividend subject to the transition rule would need to attach a “Pro Rata Share Transition Rule Statement” to Form 5471 identifying the dividend amounts, explaining why they qualify as dividends for former section 951(a)(2)(B) and describing how they increased the taxable income of a U.S. person subject to federal income tax.
The proposed regulations also include a special section 951A transition rule for cases in which a foreign corporation’s taxable year begins after Dec. 31, 2025, but ends with or within a U.S. shareholder taxable year beginning on or before Dec. 31, 2025. In that case, the prior version of Treas. Reg. section 1.951A-1 would apply, but the U.S. shareholder would determine its pro rata share of tested items by taking into account the OBBBA amendments to section 951(a)(2).
Related rules: Section 245A and section 951B
In coordination with the OBBBA amendments, the proposed regulations would phase out the extraordinary reduction rules under Treas. Reg. section 1.245A-5(e) and (f) for taxable periods of foreign corporations beginning after Dec. 31, 2025.
The proposed regulations also would apply the same section 951 and section 951A framework to foreign controlled United States shareholders (FCUSSs) and foreign controlled foreign corporations (FCFCs) under section 951B. However, the elective year-closing rule generally would not be available to FCUSSs with respect to FCFCs because those shareholders cannot own the percentage of stock required for a significant ownership variance. Mandatory closing rules would apply when a foreign corporation becomes or ceases to be an FCFC, including cases in which a CFC becomes an FCFC or an FCFC becomes a CFC.
Applicability dates and reliance
The proposed regulations under sections 951, 951A and 6038 generally would apply to taxable years of foreign corporations beginning after Dec. 31, 2025, and to taxable years of U.S. shareholders for which those foreign corporation years are relevant.
These regulations remain proposed and could change before finalization. Taxpayers may rely on the proposed regulations before final regulations are published if the taxpayer and its related parties apply the proposed rules in their entirety and in a consistent manner.
RSM Insights
For taxpayers with CFC stock ownership changes, the proposed regulations place greater significance on the exact period during which a shareholder owns CFC stock. A U.S. shareholder may have a section 951(a)(1)(A) or section 951A inclusion for a CFC year even if it does not own the stock on the last relevant day. Transactions involving acquisitions, dispositions, redemptions, issuances or other changes in ownership should therefore be evaluated in light of the applicable CFC year, the shareholder’s section 958(a) ownership, and whether the foreign corporation becomes or ceases to be a CFC during the year.
Transactions involving CFC stock may also require more detailed provisions regarding access to tax and financial information. A shareholder with a pre-closing inclusion may not have control over the CFC’s books and records after the transaction. In those cases, the parties should consider whether the transaction documents adequately address access to CFC information, cooperation on tax return preparation, consistency of reporting positions, Form 5471 data and support for any short-year computations required under the proposed regulations.
Taxpayers should evaluate the treatment of foreign income taxes when a mandatory or elective short-year closing occurs. If the CFC’s U.S. taxable year closes but its foreign taxable year does not, the proposed regulations would allocate a portion of the foreign income tax that accrues in the following U.S. taxable year to the short year ending on the closing date. This allocation may affect the timing and computation of deemed-paid foreign tax credits under section 960 and should be reviewed together with the related income inclusion.
The proposed regulations may also require closer attention to data collected for annual compliance. Taxpayers with CFCs that have multiple classes of stock, preferred equity, dividend arrearages, stock issuances or redemptions may need more detailed ownership and equity-rights information to support the pro rata share computation and Form 5471 reporting.
In summary, taxpayers should not wait until tax year 2026 to evaluate their exposure. Transactions completed in 2025 may affect transition-rule dividends, opening ownership positions, information access and the baseline facts needed to apply the proposed daily proration and year-closing rules once they become effective.
Taxpayers most likely to be affected include:
- U.S. taxpayers that sold CFC stock to an acquiring CFC during the year
- Private equity funds that acquired or sold multinational portfolio companies
- U.S.-to-U.S. acquisitions involving more than 50% shifts in CFC ownership
- Taxpayers that engaged in 2025 CFC stock acquisitions followed by dividends, including dividends potentially subject to the transition rules.
The following steps can help taxpayers assess their exposure and anticipate new reporting requirements:
- Evaluate impact of 2025 and pending 2026 transactions involving CFC stock, including acquisitions, dispositions, issuances, redemptions, restructurings and dividend transactions.
- Identify transaction dates, ownership percentages, U.S. shareholder status, CFC status and any ownership shifts that could trigger a mandatory year closing.
- Evaluate whether an elective year closing should be considered for transactions involving significant ownership shifts.
- Gather transaction documents and CFC financial, tax and ownership data needed for short-period computations, Form 5471 reporting and foreign tax credit support.
- Compute potential transaction outcomes under the proposed daily proration rules, including the impact of transition-rule dividends.
The proposed regulations represent one of the most significant changes in recent years to the mechanics of allocating subpart F income, tested income and tested loss among CFC shareholders. The application of the proposed rules to real-world ownership structures could make transactions more complex from a tax perspective.
As Treasury and the IRS consider comments and move toward final regulations, taxpayers can prepare by evaluating how the proposed rules may affect current structures, modeling transaction outcomes under the proposed framework, assessing compliance implications and monitoring future developments. Evaluating these issues before a transaction closes can help taxpayers understand the resulting tax consequences and reporting requirements.
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