Tax

On August 26, 2026, the U.S. Treasury Department (“Treasury”) and the Internal Revenue Service (“IRS”) published proposed regulations (REG-115646-25) under Sections 951 and 951A addressing the determination of a U.S. shareholder’s pro rata share of a controlled foreign corporation’s (“CFC”) subpart F income (as defined in Section 952 of the Code), tested income, or tested loss (the “Proposed Regulations”).[1] The Proposed Regulations implement changes enacted as part of the One, Big, Beautiful Bill Act (the “OBBBA”) that replaced the historical last relevant day ownership rule with an ownership period approach and authorize Treasury to require or permit a CFC’s taxable year to close following certain ownership changes.

Background on Sections 951 and 951A

Section 951 of the Code requires a U.S. Shareholder of a CFC to include in its gross income its pro rata share of the CFC’s subpart F income. A “U.S. Shareholder” is a U.S. person that owns, directly or indirectly, at least 10% of the combined voting power or value of all classes of stock in a foreign corporation. A “CFC” is a foreign corporation at least 50% of the stock of which is owned, directly or indirectly, by U.S. Shareholders (determined by vote or value). Subpart F refers to the mechanism in Code that prevents U.S. shareholders of a foreign corporation from avoiding U.S. tax on certain types of passive income earned by CFCs.

Before the OBBBA, an inclusion generally applied only to a shareholder that owned CFC stock on the last relevant day of the year, and the shareholder’s share was determined using a hypothetical year end distribution, subject to certain adjustments for midyear acquisitions and dividends. Former Section 951A generally used the same allocation principles to determine a U.S. Shareholder’s global intangible low taxed income inclusion amount.

For taxable years of foreign corporations beginning after December 31, 2025, the OBBBA replaced that approach with the following ownership period rules:

• A U.S. Shareholder may have a subpart F inclusion if it owns CFC stock on any day during the year. Its pro rata share is limited to the income attributable to periods during which it owned the stock, was a U.S. Shareholder, and the foreign corporation was a CFC.
• The inclusion is taken into account in the shareholder’s taxable year containing the last day on which it owned the stock during the CFC year. Revised Section 951A applies the same pro rata share rules in determining the shareholder’s net CFC tested income.
• A foreign corporation’s taxable year mandatorily closes for all Code purposes when it becomes or ceases to be a CFC, which isolates the CFC period from periods in which the corporation is not subject to the subpart F regime. The controlling U.S. Shareholders may elect to close the CFC’s taxable year is available if specified transfers under the same plan cause their aggregate ownership to decrease by more than 50 percentage points, by vote or value.
• Newly added Section 951B is a targeted backstop to the OBBBA’s restoration of Section 958(b)(4) and extends much of the CFC regime to certain foreign controlled U.S. shareholders of foreign controlled foreign corporations.

Highlights of the Proposed Regulations

The Proposed Regulations provide the mechanics for applying the OBBBA’s new ownership-period approach, including mandatory and elective CFC year closings, daily allocation rules, transition rules, and related reporting requirements. Key aspects are highlighted below.

Mandatory and Elective CFC Year Closings

• A foreign corporation would be required to close its taxable year when it becomes or ceases to be a CFC. The closing would occur at the end of the status change day and would apply to all shareholders and for all purposes of the Code. For this purpose, special rules would disregard certain ownership attributed through domestic partnerships (including certain S corporations treated as partnerships) and options, so that CFC status is tested by reference to U.S. shareholders actually subject to Sections 951 and 951A inclusions.

• The controlling Section 958(a) U.S. Shareholders generally could elect to close a CFC’s taxable year when transfers under the same plan reduce a U.S. Shareholder’s ownership by more than 50 percentage points. Increases in ownership by related U.S. persons generally would offset the ownership decrease for this purpose. The election generally would require a binding written agreement among the relevant U.S. Shareholders and the filing of an Elective Section 951 Year Closing Statement and would have to be made consistently for all affected CFCs in a related transaction. If multiple specified transfers occur on different days under the same plan, the significant ownership variance occurs on the date of the last such transfer.
• If a CFC year closes, foreign income taxes would be allocated between the resulting short years using a closing of the books approach. A partnership year generally would not close solely because its CFC partner’s year closes, which may place the partnership items in the CFC’s post closing short year. Treasury and the IRS request comments on whether the CFC closing instead should be treated as a deemed disposition of the CFC’s partnership interest for purposes of Section 706.

New Section 951 Allocation Rules

• A U.S. Shareholder that owns CFC stock at any time during a CFC year generally would include the subpart F income attributable to its ownership period. For a single class of stock with a constant share count, the shareholder’s pro rata share generally would equal the CFC’s annual subpart F income multiplied by the shareholder’s ownership percentage and the percentage of the CFC year represented by its qualifying ownership days.
• The Proposed Regulations would apply a daily proration approach using separate CFC year blocks for shares held for different periods. The seller would be treated as owning the stock through the transfer date, and the buyer’s ownership would begin the following day. The resulting inclusion would be taken into account in the U.S. Shareholder’s taxable year containing the last day on which it owned the CFC stock during the CFC year.
• Daily proration would allocate the CFC’s annual net subpart F income, determined after applicable limitations, deficit rules, and recapture provisions. It generally would not trace particular items to the period in which they economically arose. Consequently, absent a mandatory or elective closing of the CFC’s taxable year, income arising after a stock transfer could be allocated in part to the seller based on its ownership days.
• For multiple classes of stock, income first would be allocated among the classes using a hypothetical distribution of “allocable earnings and profits,” generally the greater of the CFC’s earnings and profits or the sum of its subpart F income and tested income. If the number of shares changes during the year, the calculation generally would use a weighted-average share count. An anti-abuse rule would disregard transactions or arrangements undertaken with a principal purpose of changing the income allocated to particular shares to avoid federal income tax.

Coordination with Section 951A and Related Provisions

• The Proposed Regulations would also apply the new pro rata share rules to foreign controlled United States shareholders (“FCUSSs”) and foreign controlled foreign corporations (“FCFCs”) under newly enacted Section 951B. Section 951B generally extends the subpart F and Section 951A regimes to certain foreign corporations that are not otherwise CFCs but would be CFCs under a targeted application of downward attribution. FCUSSs would apply the same daily-proration and mandatory year-closing rules, although the elective year-closing rule generally would not be available because FCUSSs cannot own the more-than-50-percent interest required for a significant ownership variance without causing the FCFC to be an ordinary CFC.
• The Proposed Regulations would also update Form 5471 reporting for CFC stock and ownership changes. The extraordinary reduction rules in Reg. §1.245A-5(e) and (f) would no longer apply for foreign corporation taxable years beginning after December 31, 2025, and Reg. §1.1502-80(j) would apply only to the extent former Section 951(a)(2)(B) remains applicable. The existing Section 960 deemed paid foreign tax credit rules would remain in place.
• Coordination with Section 1248 or previously taxed earnings and profits (“PTEP”) is not addressed under the Proposed Regulations. Treasury and the IRS are continuing to study whether the Section 1248 regulations should be revised to reflect the new pro rata share rules and separately intend to modify the 2024 proposed regulations under Sections 959 and 961, which were premised on former Sections 951 and 951A. Until that guidance is issued, taxpayers may need to apply the new allocation framework alongside existing Section 1248 and PTEP rules that have not yet been conformed to the OBBBA changes.

Transition Rule for Certain Dividends

• For specified CFC taxable years before the new allocation rules take effect, certain dividends generally would not reduce an acquiring shareholder’s inclusion under former Section 951(a)(2)(B), unless the dividend increased the taxable income of a U.S. person subject to federal income tax. The Proposed Regulations would codify rules consistent with Notice 2025-75.
• The Proposed Regulations would define the dividends and taxpayers covered by the transition rule, provide rules for partnerships and S corporations, and require a taxpayer claiming the reduction to document the dividend’s U.S. taxable income consequences and attach an explanatory statement to Form 5471. Treasury and the IRS declined to adopt a per se rule or safe harbor for this substantiation requirement.

Timing and Next Steps

Comments and requests for a public hearing are due October 26, 2026. Treasury and the IRS expect to finalize the Proposed Regulations by January 4, 2027.

If finalized, the principal rules under Sections 951, and 951A would apply to taxable years of foreign corporations beginning after December 31, 2025, and to the U.S. shareholder taxable years in which those foreign corporation years are relevant. Furthermore, the transition rules would apply to the specified CFC taxable years that include June 28, 2025, or begin after that date but before the first taxable year beginning after December 31, 2025.

Until final regulations are published, taxpayers may rely on all aspects of the Proposed Regulations before finalization, provided that the taxpayer apply the rules in their entirety and in a consistent manner.

Weil Observation: The Proposed Regulations should reduce the year end ownership distortions that could arise under former Section 951, although daily proration may not reflect when a CFC’s income or loss economically arose. The mandatory and elective year closing rules therefore may be consequential in acquisitions and other control transactions. Transfers pursuant to the same plan are aggregated, but the closing date is the date of the last included transfer, not necessarily the date on which the ownership reduction first exceeds 50 percentage points. Transaction parties should pay special attention to ownership thresholds, address the year closing election, access to books and records, foreign tax and partnership item allocations, Form 5471 preparation, and tax contest cooperation in their transaction documents. Complete capitalization records also will be important under the daily block and weighted average share rules.

[1] All “Section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Reg. §” references are to the Treasury Regulations promulgated thereunder.