|US IRS and Treasury Issue Regulations under Subpart F|
The US Internal Revenue Service (IRS) and the Department of Treasury (Treasury) have issued final and temporary regulations (TD 9733) under the subpart F provisions, providing guidance that:
1. The Section 956 anti-abuse rule may apply when a foreign corporation or partnership controlled by a controlled foreign corporation (CFC) is funded by any means (not just by capital contributions or debt) and to clarify that tax attributes (for example earnings and profits, and foreign taxes) associated with the Section 956 inclusion will be taken into account when determining the application of the anti-abuse rule.
2. Section 956 will apply where a CFC funds a foreign partnership (or guarantees a borrowing by a foreign partnership) in the case where the foreign partnership makes a distribution to a US partner that is related to the funding CFC.
3. Clarifies the application of the active rents and royalties exception to foreign personal holding company income (FPHCI), including providing that a CFC is not a developer unless its own employees and officers perform the required functions. The regulations also provide that employees may be located in more than one country in order to meet the active rents and royalties exceptions. In addition, the temporary regulations clarify that a CFC cannot meet the active rents and royalty exception through cost sharing arrangements and that cost sharing payments will not be treated as active leasing or licensing expenses for purposes of determining whether an organization is “substantial.”
In addition, the IRS and Treasury issued proposed regulations that would further expand the cases where obligations of a partnership will give rise to a Section 956 investment.
The temporary regulations pertaining to the Section 956 anti-avoidance rule apply to tax years of CFCs ending on or after 1 September 2015 with respect to property acquired on or after 1 September 2015. The Section 956 rules relating to obligations of partnership apply to tax years of CFCs ending on or after 1 September 2015 and to tax years of US shareholders in which or with which such tax years end. The clarifications to the active rents and royalties exception to FPHCI generally apply to rents and royalties received or accrued during tax years of CFCs ending on or after 1 September 2015, and to tax years of US shareholders in which or with which such tax years end.
The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.
Published on our website on Sep.9, 2015