IRS, Treasury Propose New Rules on CFC Shareholder Income
Proposed regulations would implement a daily proration method for determining a U.S. shareholder's pro rata share of a CFC's subpart F and tested income, replacing the previous year-end ownership test.
The U.S. Treasury Department and IRS have released proposed regulations detailing new rules for determining a U.S. shareholder’s income inclusion from a controlled foreign corporation (CFC). The regulations implement statutory changes that replace the long-standing test based on ownership on the last day of the year with a daily proration method for allocating a CFC's subpart F income and tested income. These changes will significantly affect U.S. multinationals, altering how they calculate their tax liability on foreign earnings, particularly in years involving acquisitions or dispositions of CFC stock.
The proposed rules also introduce new mechanics for mid-year ownership changes, including a mandatory closing of the CFC’s taxable year when a foreign corporation’s CFC status changes. An elective taxable-year closing is also available for certain transfers resulting in an ownership decrease of more than 50 percentage points. The proposal addresses transition rules and phases out certain older regulations now deemed unnecessary. The comment period for the proposed regulations is open until October 26, 2026, and taxpayers may rely on them before they are finalized, provided they do so consistently across their entire related-party group.