Final contract manufacturing regulations address key issues for CFCs with branches

December 2011


The IRS on December 15 issued final regulations under section 954 that address the application of the foreign base company sales income (FBCSI) rules to controlled foreign corporations (CFCs) with branches or similar establishments. The regulations, often referred to as the contract manufacturing regulations, finalize proposed regulations and withdraw temporary regulations issued in December 2008 with minor clarifying changes.

The regulations apply to tax years of CFCs beginning after June 30, 2009, and for tax years of U.S. shareholders in which or with which such tax years of the CFCs end. Taxpayers may choose to apply the final regulations retroactively with respect to open tax years that began prior to July 1, 2009, if and only if the taxpayer and all members of its affiliated group apply the final regulations, in their entirety, to the earliest tax year of each CFC that ends with or within a taxpayer's open tax year and all subsequent tax years.

The IRS also announced that it will study additional FBCSI issues and is considering whether to issue additional guidance.

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