Treasury and the IRS on June 14, 2019, released 105-page temporary regulations (the Temporary Regulations) under Section 245A as enacted by the 2017 tax reform legislation (the Act). The regulations seek to limit the benefits of section 245A where “the literal effect of section 245A would reverse the intended effect of the subpart F and GILTI regimes.”
In particular, the Temporary Regulations limit the otherwise available dividends received deduction (DRD) under Section 245A for certain dividends received from current or former controlled foreign corporations (CFCs) where: (1) a related-party extraordinary transaction was executed by the CFC on or after January 1, 2018, in a tax year to which Section 951A did not apply to such CFC, or (2) a transfer or issuance of stock on or after January 1, 2018, resulted in a reduction in a US shareholder’s pro rata share of the CFC’s subpart F or tested income. The Temporary Regulations also limit the applicability of the look-through exception to foreign personal holding company income for certain dividends received by upper-tier CFCs from lower-tier CFCs in similar circumstances.
Taxpayers that have executed transactions similar to those described should immediately review the Temporary Regulations and determine the impact, if any, on distributions made after December 31, 2017.
The Temporary Regulations limit the application of Sections 245A and 954(c)(6) for distributions received from current or former CFCs as a result of the execution of certain transactions.
Taxpayers should immediately review the Temporary Regulations to determine whether transactions executed on or after January 1, 2018, could impact application of Sections 245A or 954(c)(6).
Partner, Washington National Tax Services ITS Leader, PwC US