Proposed Regulations would reduce Section 956 amounts for domestic corporations

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November 2018


Treasury on October 31 released proposed regulations under Section 956 (the Proposed Regulations).  For certain US shareholders, the Proposed Regulations would reduce the amount otherwise determined under Section 956 with respect to a US shareholder to the extent the US shareholder would be allowed a deduction under Section 245A if it had received a distribution from the controlled foreign corporation (CFC) in an amount equal to the amount otherwise determined under Section 956.

Section 956 was enacted to provide that untaxed earnings of a foreign corporation would be subject to US federal income tax when repatriated to the United States other than as a taxable distribution.  Under the 2017 tax reform legislation (the Act), Congress enacted Section 245A, which generally provides a 100% dividends received deduction (DRD) for the foreign-source portion of dividends received by a US corporation from foreign corporations with respect to which it is a US corporate shareholder. 

As explained in the preamble to the Proposed Regulations, Treasury determined that the current broad application of Section 956 to corporate US shareholders would be inconsistent with the purposes of Section 956 and the scope of transactions it is intended to address as a result of Section 245A.  Therefore, the Proposed Regulations, if finalized, would exclude corporate US shareholders from the application of Section 956 to the extent necessary to maintain symmetry between the taxation of actual repatriations and the taxation of effective repatriations pursuant to Section 956.  Furthermore, the preamble states that taxpayers may apply the Proposed Regulations, prior to promulgation of final regulations, for tax years of a CFC that begin after December 31, 2017, provided the Proposed Regulations are consistently applied to all related CFCs.

Taxpayers should review the Proposed Regulations immediately and determine the impact, if any, on their business and industry, including whether to apply the Proposed Regulations prior to finalization.

The takeaway

The Proposed Regulations reflect Treasury’s intention to achieve symmetrical treatment between actual dividends eligible for Section 245A and transactions that are substantially similar to a dividend under Section 956.  In maintaining that symmetry, the Proposed Regulations would exempt amounts from taxation under Section 956 to the extent those amounts would be eligible for the Section 245A deduction had an actual dividend distribution been made.

In particular, taxpayers should collaborate with their Treasury functions and other affected stakeholders to assess the impact of this guidance, such as the ability to permit broader participation of US companies in foreign cash pools and/or the consolidation of cash pool activity in a single location – United States or foreign.

Contact us

Michael DiFronzo

Washington National Tax Services International Tax Leader, PwC US

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