# Prop. Treas. Reg. § 1.56A-6: AFSI adjustments with respect to controlled foreign corporations. Proposed regulation, not in force. REG-112129-23, 89 FR 75062, published 2024-09-13 . Interprets 26 U.S.C. § 56A. Par. 9. Sections 1.56A-0 through 1.56A-27 are added to read as follows: (a) Overview. This section provides rules under section 56A(c)(3) of the Code for determining adjustments to AFSI with respect to controlled foreign corporations. Paragraph (b) of this section provides rules for determining a CAMT entity's adjustment to AFSI with respect to controlled foreign corporations in which the CAMT entity is a United States shareholder. Paragraph (c) of this section provides rules for computing a controlled foreign corporation's adjusted net income or loss. Paragraph (d) of this section defines the type of dividends excluded from a controlled foreign corporation's adjusted net income or loss. Paragraph (e) of this section provides examples illustrating the application of the rules in this section. Paragraph (f) of this section provides the applicability date of this section. (b) Section 56A(c)(3) adjustment to AFSI —(1) Aggregate adjustment. Except as provided under paragraph (b)(3) of this section, for any taxable year, a CAMT entity that is a United States shareholder of one or more controlled foreign corporations makes a single adjustment to its AFSI for its taxable year that is equal to the aggregate of its pro rata share of the adjusted net income or loss of each such controlled foreign corporation, with such aggregate amount reduced as provided under paragraphs (b)(2) and (4) of this section. The CAMT entity's pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined for the taxable year of the controlled foreign corporation that ends with or within the taxable year of the CAMT entity and is determined under the principles of section 951(a)(2) of the Code (including the aggregation rules in § 1.958-1(d)). (2) Tax reduction. An applicable corporation that does not choose to have the benefits of subpart A of part III of subchapter N of chapter 1 for the taxable year reduces the amount of the adjustment otherwise determined under paragraph (b)(1) of this section by the amount that would be described in § 1.59-4(d)(3) if the applicable corporation were to choose to have such benefits, reduced to reflect the suspensions and disallowances described in § 1.59-4(b)(1) that apply at the level of the United States shareholder. (3) Aggregate negative adjustment. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be negative (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking paragraph (b)(4) of this section into account), then there is no adjustment under paragraph (b)(1) of this section for the taxable year. (4) Reduction for utilization of a CFC adjustment carryover. If the adjustment determined under paragraph (b)(1) of this section with respect to a taxable year of a United States shareholder would be positive (after taking into account the reduction provided under paragraph (b)(2) of this section but before taking this paragraph (b)(4) into account), then the adjustment under paragraph (b)(1) of this section (after taking into account the reduction provided under paragraph (b)(2) of this section) is reduced by the aggregate amount of CFC adjustment carryovers to the taxable year (as determined under paragraph (b)(5) of this section), but not below zero. (5) CFC adjustment carryover mechanics. A CFC adjustment carryover for any taxable year (including a taxable year in which the corporation is not an applicable corporation) is carried forward to each taxable year following the taxable year in which the CFC adjustment carryover arose. The amount of a CFC adjustment carryover carried forward to a taxable year is the amount of the CFC adjustment carryover remaining (if any) after the application of paragraph (b)(4) of this section. CFC adjustment carryovers are used in the order of the taxable years in which the CFC adjustment carryovers arose. For purposes of determining the amount of a CFC adjustment carryover carried forward to the first taxable year a corporation is an applicable corporation (and any subsequent taxable year), paragraph (b)(4) of this section applies to reduce the CFC adjustment carryover in taxable years beginning after the taxable year the CFC adjustment carryover arose and before the first taxable year in which the corporation is an applicable corporation. (6) Definition of CFC adjustment carryover. The term CFC adjustment carryover means, with respect to a United States shareholder for any taxable year ending after December 31, 2019, the amount of the negative adjustment, if any, described in paragraph (b)(3) of this section. (7) Tax consolidated groups. Members of a tax consolidated group are treated as a single entity for purposes of this paragraph (b). See also § 1.1502-56A(a)(2). For rules regarding the use of CFC adjustment carryovers by a tax consolidated group, see § 1.1502-56A(h). (c) Computing the adjusted net income or loss of a controlled foreign corporation —(1) In general. A controlled foreign corporation's adjusted net income or loss is equal to the controlled foreign corporation's FSI for the taxable year of the controlled foreign corporation, adjusted for all AFSI adjustments provided under the section 56A regulations, except as provided under paragraphs (c)(2) through (5) of this section. For purposes of determining a controlled foreign corporation's adjusted net income or loss, references to AFSI in other sections of the section 56A regulations, except for references to AFSI in § 1.56A-1(b)(1) and (e), are treated as references to adjusted net income or loss. Adjusted net income or loss must be expressed in U.S. dollars. Any item included in adjusted net income or loss that is not expressed in U.S. dollars must be translated from the relevant currency to U.S. dollars using the relevant weighted average exchange rate, as defined in § 1.989(b)-1, for the controlled foreign corporation's taxable year. (2) Adjustments relating to ownership of stock of a foreign corporation —(i) In general. Adjustments in this paragraph (c)(2) apply in lieu of the adjustments described in § 1.56A-4(c)(1) (providing adjustments to AFSI with respect to ownership of stock in a foreign corporation). (ii) Amounts relating to ownership of stock of a foreign corporation reflected in controlled foreign corporation's FSI. Adjusted net income or loss of a controlled foreign corporation excludes any items of income, expense, gain, and loss resulting from ownership of stock of a foreign corporation, including acquiring or disposing of such stock, reflected in the controlled foreign corporation's FSI. (iii) Amounts relating to ownership of stock of a foreign corporation included for regular tax purposes —(A) In general. Except as provided under paragraph (c)(2)(iii)(B) of this section, adjusted net income or loss of a controlled foreign corporation includes any items of income, deduction, gain, and loss resulting from the controlled foreign corporation's ownership of stock of a foreign corporation, including acquiring or transferring such stock, for regular tax purposes (taking into account section 961(c) of the Code). (B) Dividends received from another foreign corporation. Adjusted net income or loss of a controlled foreign corporation does not include the amount of any dividend received from another foreign corporation to the extent the dividend is a CAMT excluded dividend as defined in paragraph (d) of this section. (iv) Stock of a foreign corporation owned by a partnership. If a partnership directly owns stock of a foreign corporation, then in determining the adjusted net income or loss of a controlled foreign corporation that is a partner in the partnership (or an indirect partner, in the case of tiered partnerships), the partner takes into account the items described in paragraph (c)(2)(iii) of this section (including taking into account the exception provided in paragraph (c)(2)(iii)(B) of this section) that are allocated to the partner by the partnership for regular tax purposes. (3) Controlled foreign corporations engaged in a U.S. trade or business. A controlled foreign corporation's adjusted net income or loss is not limited to amounts taken into account in determining AFSI under § 1.56A-7 (providing that the AFSI of a foreign corporation is limited to income that is effectively connected with the conduct of a trade or business within the United States). If a controlled foreign corporation is an applicable corporation, the controlled foreign corporation's adjusted net income or loss is reduced by the amount of AFSI of the controlled foreign corporation (such AFSI determined by taking § 1.56A-7 into account). (4) Foreign income tax expense. The AFSI adjustment provided under § 1.56A-8(c) does not apply in computing a controlled foreign corporation's adjusted net income or loss. (5) FSNOL carryovers. The AFSI adjustment provided under § 1.56A-23(c) (providing a reduction to AFSI for FSNOL carryovers) does not apply in computing a controlled foreign corporation's adjusted net income or loss. (d) Definition of CAMT excluded dividend. The term CAMT excluded dividend means a dividend received by a controlled foreign corporation to the extent the dividend is excluded from— (1) The recipient controlled foreign corporation's gross income under section 959(b) of the Code; or (2) Both— (i) The recipient controlled foreign corporation's foreign personal holding company income under section 954(c)(3) (relating to certain income received from related persons) or 954(c)(6) (relating to certain amounts received from related controlled foreign corporations) of the Code; and (ii) The recipient controlled foreign corporation's gross tested income under § 1.951A-2(c)(1)(iv) (relating to dividends received from related persons). (e) Examples. The following examples illustrate the application of the rules in this section. For purposes of these examples, no entity is a member of a tax consolidated group, each entities' functional currency is the U.S. dollar, and each entity uses the calendar year as its taxable year and for AFS purposes. (1) Example 1: Dividend received by a controlled foreign corporation from another controlled foreign corporation —(i) Facts. X is a domestic corporation that owns all the stock of FC1, a controlled foreign corporation, which owns all the stock of FC2, a controlled foreign corporation. FC2 distributes $100x of earnings and profits described in section 959(c)(3) to FC1, and the dividend qualifies for the exception to foreign personal holding company income under section 954(c)(6) and the exception to gross tested income under § 1.951A-2(c)(1)(iv). The $100x dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1. (ii) Analysis. Under paragraph (b)(1) of this section, X's AFSI includes the sum of X's pro rata shares of the adjusted net income or loss of each of FC1 and FC2, because X is a United States shareholder of FC1 and FC2, both of which are controlled foreign corporations. For purposes of computing FC1's adjusted net income or loss, there is no adjustment under paragraph (c)(2)(ii) of this section, because the dividend received by FC1 does not result in any item of income, expense, gain, or loss being reflected in the FSI of FC1. Under paragraph (c)(2)(iii) of this section, the entire dividend is excluded from FC1's adjusted net income or loss because the dividend is a CAMT excluded dividend. The dividend is a CAMT excluded dividend because the dividend qualifies for the exception to subpart F income under section 954(c)(6) and the exception to tested income under § 1.951A-2(c)(1)(iv). (2) Example 2: Sale of stock of lower-tier controlled foreign corporation— (i) Facts. The facts are the same as in paragraph (e)(1) of this section ( Example 1 ), except that FC2 does not pay a dividend to FC1, and instead FC1 sells all the stock of FC2 to a third party for cash. For regular tax purposes, FC1 recognizes $100x of gain, all of which is recharacterized as a dividend under section 964(e)(1) of the Code and treated as subpart F income of FC1 under section 964(e)(4)(A)(i). Furthermore, under section 964(e)(4)(A)(iii), X qualifies for a $100x dividends-received deduction under section 245A of the Code. FC1's sale of the stock of FC2 results in $100x of gain being reflected in the FSI of FC1. (ii) Analysis. Under paragraph (c)(2)(ii) of this section, the $100x of gain reflected in the FSI of FC1 is excluded from FC1's adjusted net income or loss. Under paragraph (c)(2)(iii) of this section, FC1's adjusted net income or loss includes the $100x of recharacterized dividend income because the dividend is included in FC1's subpart F income and therefore is not a CAMT excluded dividend. Under § 1.56A-4(c)(1)(ii), X's AFSI is reduced by $100x as a result of the dividends-received deduction under section 245A. (3) Example 3: Controlled foreign corporation held through a partnership —(i) Facts. X is a domestic corporation that owns 20% of the partnership interests in PRS, a domestic partnership. PRS owns all the stock of FC, a controlled foreign corporation. In Year 1, FC's adjusted net income or loss is $100x and X's pro rata share of FC's adjusted net income or loss is $20x. (ii) Analysis. Under paragraph (b)(1) of this section, a CAMT entity's pro rata share of the adjusted net income or loss of a controlled foreign corporation is determined under the principles of section 951(a)(2). Under these principles, a partnership is not treated as owning stock of a controlled foreign corporation for purposes of determining pro rata share under paragraph (b)(1) of this section. See §§ 1.951-1(a)(4) (directing taxpayers to § 1.958-1(d) for rules regarding the ownership of stock of a foreign corporation through a domestic partnership for purposes of section 951) and 1.958-1(d) (providing generally that for purposes of applying section 951, a domestic partnership is not treated as owning stock of a foreign corporation). Accordingly, PRS is not treated as owning stock of FC, and no adjustment is made to PRS's modified FSI under paragraph (b)(1) of this section. However, under paragraph (b)(1) of this section, in Year 1, X's AFSI includes X's pro rata share of the adjusted net income or loss of FC, because X is a United States shareholder of FC, a controlled foreign corporation. Therefore, in Year 1, X includes in its AFSI $20x of FC's adjusted net income or loss. (f) Applicability date —(1) In general. Except as described in paragraph (f)(3) of this section, if the conditions described in paragraphs (f)(2)(i) and (ii) of this section are not satisfied, this section applies to taxable years of CAMT entities that are United States shareholders ending after September 13, 2024, and to taxable years of controlled foreign corporations that end with or within such taxable years. (2) Multiple United States shareholders with different taxable years. Except as described in paragraph (f)(3) of this section, this section applies to taxable years of controlled foreign corporations ending after September 13, 2024, and to taxable years of CAMT entities that are United States shareholders in which or with which such taxable years end, if: (i) More than one CAMT entity that is a United States shareholder but not a domestic partnership owns (within the meaning of section 958(a)) stock in the controlled foreign corporation; and (ii) At least one, but not all, of the United States shareholders referred to in paragraph (f)(2)(i) has a taxable year ending after September 13, 2024 and the controlled foreign corporation's taxable year that ends with or within such taxable year ends on or before September 13, 2024. (3) Transactions involving foreign stock. To the extent a controlled foreign corporation's adjusted net income or loss would include an item resulting from the occurrence of a transfer (as defined in § 1.56A-4(b)(3)), this section applies to transfers occurring after September 13, 2024.