In Rev Proc 2019-40, 2019-43 IRB, the IRS has provided relief to certain U.S. persons that own stock in certain foreign corporations affected by the repeal of Code Sec. 958(b)(4) by the Tax Cuts and Jobs Act (PL 115-97). The Rev. Proc. limits the inquiries U.S. persons must make to determine whether certain foreign corporations are controlled foreign corporations (CFCs) and allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and to satisfy CFC reporting requirements if more detailed information is not available.
Background. Under Code Sec. 958(b) ,the stock ownership attribution rules in Code Sec. 318 generally applied to treat (1) any U.S. person as a U.S. shareholder of a foreign corporation, (2) a person as a related person within the meaning of Code Sec. 954(d)(3), (3) the stock of a domestic corporation as owned by a U.S. shareholder of a CFC for purposes of Code Sec. 956(c)(2), or (4) a foreign corporation as a CFC. As in effect before repeal, Code Sec. 958(b)(4) provided that the downward attribution rules in Code Sec. 318(a)(3)(A), Code Sec. 318(a)(3)(B), and Code Sec. 318(a)(3)(C) were not to be applied so as to consider a U.S. person as owning stock owned by a foreign person.
Because of the repeal of Code Sec. 958(b)(4), stock of a foreign corporation owned by a foreign person can now be attributed to a U.S. person under Code Sec. 318(a)(3) for purposes of determining whether a U.S. person is a U.S. shareholder of the foreign corporation and, therefore, whether the foreign corporation is a CFC. Thus, U.S. persons that were not treated as U.S. shareholders before the repeal of Code Sec. 958(b)(4) may be treated as U.S. shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs.
In addition, taxpayers in certain circumstances are required to include in gross income amounts under Code Sec. 951 (subpart F inclusion amounts) and Code Sec. 951A (Global Intangible Low-Tax Income (GILTI) inclusion amounts) attributable to, and report amounts with respect to, foreign corporations that are CFCs solely because of the repeal of Code Sec. 958(b)(4), even though those taxpayers may have limited ability (1) to determine whether such foreign corporations are CFCs; and (2) to obtain the information necessary to accurately determine these inclusion amounts.
Code Sec. 964(a) provides that a foreign corporation’s earnings and profits (E&P) is calculated according to rules that are substantially similar to those that apply to domestic corporations. Code Sec. 965 requires U.S. shareholders to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations (SFCs) as if those earnings had been repatriated to the U.S. Very generally, a SFC means either a CFC, or a foreign corporation (other than a passive foreign investment company that is not also a CFC) that has a U.S. shareholder that is a domestic corporation.
Generally, Code Sec. 6038 requires information reporting with respect to certain foreign corporations and partnerships. Failure to furnish information returns to the IRS is subject to a penalty. (Code Sec. 6038(b) and Code Sec. 6038(c))
Generally, Code Sec. 6662(a) imposes an accuracy-related penalty equal to 20 percent of the underpayment to which it applies.
…Safe harbor for determining CFC status. The IRS will accept a U.S. person’s determination that a foreign corporation does not meet the Code Sec. 957 ownership requirements and, therefore, is not a CFC with respect to that person, under certain conditions. This safe harbor does not apply to a foreign corporation that is a U.S.-controlled CFC. (Rev Proc 2019-40, sec. 4.02)
To qualify for the safe harbor, the U.S. person cannot have actual knowledge, statements received, and/or enough reliable publicly available information for the U.S. person to determine that the Code Sec. 957 ownership requirements are met. For this purpose, the term Code Sec. 957 ownership requirements means, with respect to a foreign corporation and any given day of a taxable year of the foreign corporation, stock ownership that would cause the foreign corporation to be a CFC on such day. (Rev Proc 2019-40, sec 3.08)
If the U.S. person directly owns stock of, or an interest in, a foreign entity (top-tier entity), the U.S. person inquires of the top-tier entity whether it meets the CFC stock ownership requirements, whether, how, and to what extent such top-tier entity directly or indirectly owns stock of one or more foreign corporations, and whether, how, and to what extent such top-tier entity owns directly or indirectly stock of, or an interest in, one or more domestic entities. (Rev Proc 2019-40, sec 4.02(b)(ii))
…General safe harbor for using alternative information. The IRS will accept the use of alternative information by a taxpayer if information satisfying the current requirements is not readily available to a U.S. shareholder with respect to the foreign controlled CFC. Thus, a subpart F inclusion amount, a GILTI inclusion amount or an amount in a record required to be maintained under Code Sec. 964(c), Reg §1.964-3, or Reg §1.964-4 may be determined by the U.S. shareholder based on alternative information with respect to the foreign-controlled CFC. (Rev Proc 2019-40, sec 5.02)
…Safe harbor for using alternative information for determining amounts subject to transition tax. The IRS will accept the use of alternative information in the case of a SFC, other than either a foreign-controlled CFC with respect to which there is a related U.S. shareholder or a U.S.-controlled CFC, if information satisfying the current requirements is not readily available to an unrelated U.S. shareholder with respect to the SFC. Thus, a U.S. shareholder may determine a transition tax amount based on alternative information with respect to the SFC, provided the U.S. shareholder reports such amount on a return both due and filed before October 1, 2019, or a return both due and filed after October 1, 2019.
…Penalties under Sec. 6038 and Sec. 6662 not applicable. The IRS will not impose penalties under Code Sec. 6038 or Code Sec. 6662 to the extent such penalties would apply to: (1) a U.S. person determining that a foreign corporation does not meet the CFC ownership requirements consistent with section 4.02 of this revenue procedure; (2) a U.S. person determining a subpart F inclusion amount or GILTI inclusion amount, an amount in a record required to be maintained under Code Sec. 964(c), Reg §1.964-3, or Reg §1.964-4, or an amount reported on a Form 5471 on the basis of alternative information consistent with section 5.02 of this revenue procedure, or (3) a U.S. person determining a transition tax amount on the basis of alternative information consistent with section 6.02 of this revenue procedure. (Rev Proc 2019-40, sec 7.02)
…Form 5471 filing requirements. The IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of a CFC are required to provide. It will also limit the filing requirements of U.S. shareholders who only constructively own stock of the CFC solely due to downward attribution from another person. (Rev Proc 2019-40, sec 8.02)
Applicability dates. Unless otherwise provided in future guidance, taxpayers may apply secs 4, 5, 6, and 7 of this procedure with respect to the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of such foreign corporation, and with respect to the taxable years of U.S. shareholders in which or with which such taxable years of such foreign corporation end. (Rev Proc 2019-40, sec 10)
Taxpayers may apply the rules described in secs 5, 6, and 8 of this procedure, before the instructions to the Form 5471 are modified, for the last taxable year of a foreign corporation beginning before January 1, 2018, and each subsequent taxable year of the foreign corporation, and with respect to the taxable years of U.S. shareholders in which or with which such taxable years of the foreign corporation end. (Rev Proc 2019-40, sec 10)