Treasury releases final Section 958 regulations and proposed PFIC regulations with key changes

In brief

Treasury and the IRS on January 25 published final regulations under Section 958 on determining stock ownership and proposed regulations regarding the treatment of domestic partnerships and S corporations that own stock of passive foreign investment companies (PFICs) and their domestic partners and shareholders.

The final regulations (2022 Final Regulations) finalize, with modifications, a portion of the previously proposed regulations (2019 Proposed Regulations) issued on June 21, 2019 (REG-101828-19) that generally treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Section 951. The 2022 Final Regulations apply to tax years of foreign corporations that begin on or after January 25, 2022, and to tax years of US persons in which or with which such tax years of foreign corporations end. A domestic partnership may apply the 2022 Final Regulations to tax years of a foreign corporation beginning after December 31, 2017, subject to certain requirements.

The proposed regulations (2022 Proposed Regulations) provide guidance on the treatment of PFICs held by domestic partnerships and S corporations, as well as on other PFIC-and CFC-related issues. The 2022 Proposed Regulations provide guidance regarding the determination of the controlling domestic shareholders of foreign corporations, the owner of a CFC or qualified electing fund (QEF) that makes an election under Section 1411, the treatment of S corporations with accumulated E&P, and the determination and inclusion of related-person insurance income (RPII). The 2022 Proposed Regulations generally adopt an aggregate approach, requiring reporting, elections, and inclusions at the partner or shareholder level rather than at the domestic partnership or S corporation level as historically has been the case. The 2022 Proposed Regulations generally apply for tax years of shareholders beginning on or after the date of the filing of these regulations as final in the Federal Register.

Action item: Taxpayers should review new regulations with respect to their direct and indirect foreign investments to determine whether and, if appropriate, how this latest guidance might impact the PFIC status of any such investment. The 2022 Proposed Regulations invite comments on a number of issues, and businesses that would be affected by the new rules should consider providing comments during the comment period, which ends April 25, 2022.