US Treasury Proposes Daily Proration for CFC Income Inclusion
Proposed regulations replace the "last day of the year" test for Subpart F and tested income with a daily proration method, requiring immediate attention to compliance systems and M&A provisions.
The U.S. Treasury has released proposed regulations implementing major international tax reforms, fundamentally altering how U.S. shareholders account for income from Controlled Foreign Corporations (CFCs). The new rules abandon the 'last day of the year' ownership test for Subpart F and Net CFC Tested Income inclusions, a long-standing feature of the tax code that allowed for significant tax planning through mid-year stock transfers. In its place, the regulations establish a period-based ownership model requiring daily proration to determine a shareholder's income share. The framework also mandates tax-year closings when a company's CFC status changes and expands reporting on Form 5471.
However, the proposal does not yet clarify how these changes will coordinate with rules governing previously taxed earnings and profits (PTEP) or the treatment of gain on CFC stock sales under Section 1248, leaving material uncertainty. U.S. multinationals can rely on the proposed rules before finalization, but should immediately update compliance systems to track daily ownership and review tax covenants in M&A agreements. The comment period closes October 26, 2026.