Treasury issues temporary regulations under Section 245A

Overview

Treasury and the IRS on June 14, released 105-page temporary regulations under Section 245A as enacted by the 2017 tax reform legislation.  The regulations seek to limit the benefits of Section 245A where, according to the preamble, “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 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 (an ‘Extraordinary Disposition’), 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 (an ‘Extraordinary Reduction’).  

The takeaway

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).

The above is not an exhaustive list of the provisions in the Temporary Regulations.