Tax Insight

Treasury proposes new CFC pro rata share rules

Insight
5 minute read
August 27, 2026

What happened?

Treasury and the IRS on August 26 published proposed regulations implementing the One Big Beautiful Bill Act (OBBBA) changes to the controlled foreign corporation (CFC) pro rata share rules under Sections 951 and 951A. Most significantly, the proposal would allocate subpart F income, tested income, and tested loss based on the period during which a US shareholder directly or indirectly owns CFC stock, generally using daily proration, rather than limiting Section 951(a)(1)(A) inclusions to shareholders that own stock on the last day of the tax year of the foreign corporation on which it was a CFC (the last relevant day).

The proposal also would require a CFC tax year to close when the corporation becomes or ceases to be a CFC and would permit an elective closing for certain significant ownership shifts exceeding 50 percentage points. It also addresses transition-period dividends, related Form 5471 reporting, midyear stock issuances and redemptions, and the phaseout of the Reg. 1.245A-5 extraordinary reduction rules for later CFC tax years.

Why is it relevant?

The proposed regulations could change the tax consequences of CFC acquisitions and dispositions because a seller may retain a subpart F or tested-income allocation for its ownership period even though it no longer owns the CFC at year-end. Mandatory or elective year closings also could affect the timing of inclusions, Section 956 computations, foreign tax allocations, short-period reporting, and the information that buyers and sellers must exchange after closing.

The rules generally implement the statutory changes made by the OBBBA, while providing specific approaches for applying those changes, particularly daily proration as the general rule and a greater-than-50-percentage-point threshold for elective year closings. The proposal also would phase out the extraordinary reduction rules under Reg. 1.245A-5 once the revised pro rata share rules apply.

Actions to consider

Taxpayers should identify 2025 transition-period dividends and 2026 CFC ownership changes that could be affected, model the consequences of daily proration versus a mandatory or (where available) elective year closing, and review transaction agreements for provisions addressing elections, short-period returns, information sharing, foreign tax allocations, and Form 5471 reporting. Taxpayers considering early reliance also should evaluate whether they and their related parties can apply the proposed regulations in their entirety and consistently, as required by the proposal.

Companies should consider providing comments on the proposed regulations, which are due by October 26, 2026.