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FAQs on Sec. 958(b)(4) and Sec. 951B

3 hours ago · 1 min read

H.R. 1, P.L. 119-21, the law known as the One Big Beautiful Bill Act (OBBBA), reinstates subsection (b)(4) involving constructive ownership under Sec. 958, Rules for determining stock ownership and streamlines U.S. shareholder reporting requirements, which reduces Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, filings and simplifies Subpart F/Global Intangible Low-Taxed Income (GILTI ) exposure. Additionally, a newly created Sec. 951B, Amounts included in gross income of foreign controlled United States shareholders, creates a balance between providing relief from overly broad Controlled Foreign Corporation (CFC) status and enforcing anti-abuse measures.

This resource aims to clarify questions that may arise regarding these international tax law changes, which will take effect for the tax years of foreign corporations beginning after Dec. 31, 2025.

What is Sec. 958(b)(4), and why is it important?

Prior to its repeal in the Tax Cuts and Jobs Act (TCJA), Sec. 958(b)(4) prevented the “downward attribution” of stock from a foreign owner to a U.S. entity under the Sec. 318, Constructive ownership of stock attribution rules. This meant that stock owned by a foreign person cannot be attributed to a U.S. person for CFC status and U.S. shareholder status. This provision is important because it limits the circumstances under which a foreign corporation is considered a CFC, which in turn restricts the application of subpart F and related anti-deferral rules to U.S. shareholders. After its repeal, significant analysis and compliance was required to assess what U.S. persons were subject to the CFC reporting and income inclusion rules. Congressional intent was initially meant to eliminate the ability to engage in specific transactions in order to avoid certain imputed income provisions of the CFC rules. The final legislation went beyond this initial goal.

What did the H.R. 1 change about Sec. 958(b)(4)?

H.R. 1 has reinstated Sec. 958(b)(4), which was repealed by the TCJA in 2017. Consequently, for tax years of foreign corporations beginning after Dec. 31, 2025, stock owned by a foreign individual will no longer be attributed downward to a U.S. person for the purposes of determining whether a foreign corporation qualifies as a CFC or whether a U.S. person is considered a U.S. shareholder of a CFC.

What impact does the reinstatement of Sec. 958(b)(4) have on determining CFC status?

A U.S. person will not be considered the owner of a foreign corporation's stock as a result of the downward attribution rules. As a result, many foreign corporations that became CFCs solely due to downward attribution after the TCJA won't be classified as CFCs under H.R. 1 for tax years beginning after Dec. 31, 2025.

Does the reinstatement of Sec. 958(b)(4) apply retroactively?

No. H.R. 1's reinstatement of Sec. 958(b)(4) only takes effect for tax years of foreign corporations beginning after Dec. 31, 2025. The reinstatement does not apply retroactively to earlier years and downward attribution must still be taken into account for US federal income tax filings through the entity’s 2025 tax year.

What is the effect of the reinstatement of Sec. 958(b)(4) on U.S. shareholders’ reporting obligations?

U.S. persons who are not treated as U.S. shareholders of a CFC solely because of downward attribution from a foreign person generally will not have to file Form 5471as a Category 5 filer for those foreign corporations.

Are there any exceptions to the reinstated Sec. 958(b)(4)?

Yes. Although Sec. 958(b)(4) generally blocks downward attribution from foreign persons, H.R. 1 added Sec. 951B, which applies the CFC inclusion rules to “foreign controlled U.S. shareholders” of “foreign controlled foreign corporations." Accordingly, for purposes of Sec. 951B, downward attribution from foreign persons may still be a consideration.

What's the relationship between the H.R. 1’s new Sec. 951B and Section 958(b)(4)?

Sec. 951B establishes a new framework for “foreign controlled United States shareholders" and “foreign controlled foreign corporations." As such, downward attribution may still be applied, which can lead to the CFC inclusion rules even if the general CFC rules would not typically apply. Sec. 951B provides a more tailored approach, addressing policy concerns without automatically categorizing every foreign affiliate as a CFC.

How does reinstating Sec. 958(b)(4) impact U.S. multinational groups in practical terms?

U.S. multinational groups with foreign parent companies and U.S. subsidiaries will typically have fewer foreign corporations classified as CFCs because of downward attribution. This lowers the compliance burden and reduces the risk of CFC income inclusions for U.S. shareholders in these structures, except where Sec. 951B applies.

How should taxpayers handle a situation where they're unsure if a foreign corporation is a CFC under the new rules?

Taxpayers should carefully analyze their ownership structures considering the reinstated of Sec. 958(b)(4) and the new Sec. 951B rules.

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