The Downward Spiral of Downward Attribution

The Tax Cuts and Jobs Act (TCJA) created significant changes for both taxpayers and practitioners. One of the most disruptive and wide-ranging changes to taxpayers of TCJA was the repeal of Internal Revenue Code (IRC) Section 958(b)(4), effective as of January 1, 2018.


A foreign corporation is treated as a controlled foreign corporation (CFC) to the extent that more than 50% of the total combined voting power or value of the stock of the corporation is owned directly, indirectly, or constructively by “United States shareholders” on any day during the taxable year of the foreign corporation. In this context, a “United States shareholder” is a US person who owns 10% or more of the total combined voting power or value of the foreign corporation.

Generally, Section 958(b) requires taxpayers to apply rules of IRC Section 318(a) – i.e., so-called “downward attribution” rules. Under these rules, stock owned by a person (e.g., an individual, a corporation) is deemed to be owned by certain partnerships, estates, trusts and corporations in which that person has a certain interest.

Before TCJA, Section 958(b)(4) disallowed “downward attribution” of stock held by a foreign person to a US person. Following the repeal of Section 958(b)(4), a domestic corporation may be deemed to constructively own stock of a foreign corporation owned by another foreign corporation, to the extent that certain specified relationships exist between all three. This, in turn, may cause the foreign corporation to be treated as a CFC for US tax purposes even though it does not have any direct or indirect United States shareholders.

Impact of the Repeal 

Section 958(b)(4) has been repealed by Congress to target transactions that would allow United States shareholders to potentially avoid Subpart F and GILTI inclusions. GILTI, or “global intangible low-taxed income,” is, roughly, taxable income derived from CFCs by a United States shareholder. However, this repeal and the attendant US tax ramifications (summarized below) have created problems for many US taxpayers, who are invested in foreign structures. As a result, US taxpayers that were not previously treated as United States shareholders may be treated as United States shareholders. Further, foreign corporations that were not previously treated as CFCs may now be treated as CFCs. This is especially problematic for large private equity funds that have investors who own at least 10% of the funds.

Structuring Solutions for Mitigation

Many taxpayers are hoping for Congress to pass a technical correction bill to correct the unintended consequences of the repeal of Section 958(b)(4). However, until this correction happens, some planning opportunities may help mitigate the unintended consequences due to the repeal of Section 958(b)(4). Planning opportunities that may be considered in this regard are

  • Check-the-box election – i.e., in this context, a US tax election that allows a foreign corporation to be treated as a disregarded entity for US tax purposes.
  • Section 962 Election – i.e., a US tax election that is available to an individual US taxpayer, that allows him to be taxed as if he were a domestic corporation concerning subpart F and GILTI inclusions, thereby allowing him to be taxed at a lower US corporate income tax rate (as compared to US individual tax rate) for those items.
  • High-Tax Exception Election – i.e., a US tax election which allows United States shareholder of a CFC to exclude amounts that would otherwise be treated as GILTI or subpart F from his US taxable income to the extent that the foreign effective tax rate to those amounts exceeds 90% of the top US corporate income tax rate (currently, 18.9%, based on the current corporate income tax rate of 21%).

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If you would like to discuss the impact of these rules for you or opportunities to mitigate the impact, please contact us.

Article written by Inna Ganz