Par. 4. Section 1.951-1 is amended by: 1. Revising paragraphs (a), (b), (d) through (f), and (h); and 2. Adding paragraph (i). The revisions and addition read as follows:
(a) Scope. This section sets forth the rules for determining amounts included in the gross income of a United States shareholder under section 951(a). Paragraph (b) of this section provides the general rule for amounts required to be included in gross income under section 951(a)(1)(A) and (B). Paragraph (c) of this section is reserved. Paragraph (d) of this section provides rules that require or permit the closing of the taxable year of a foreign corporation, which, if applicable, are necessary to determine the CFC year with respect to which a United States shareholder determines its pro rata share of subpart F income. Paragraph (e) of this section prescribes the rules for determining a United States shareholder's pro rata share of subpart F income for a CFC year. Paragraph (f) of this section provides a rule for determining the holding period of an asset (including stock of a controlled foreign corporation). Paragraph (g) of this section defines United States shareholder. Paragraph (h) of this section provides additional definitions. Paragraph (i) of this section provides applicability dates. For rules applying this section to foreign controlled United States shareholders and foreign controlled foreign corporations, see section 951B (generally replacing references in this section to the term “United States shareholder” with the term “foreign controlled United States shareholder” and the term “controlled foreign corporation” with the term “foreign controlled foreign corporation”).
(b) In general —(1) Section 951(a)(1)(A) inclusions. Each United States shareholder of a foreign corporation that owns stock in the foreign corporation on any day during a CFC year of the foreign corporation must, for the United States shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year, include in gross income the United States shareholder's pro rata share (determined under paragraph (e) of this section) of the foreign corporation's subpart F income for the CFC year.
(2) Section 951(a)(1)(B) inclusions. Each United States shareholder of a foreign corporation that owns stock in the foreign corporation on the last day of a CFC year on which the foreign corporation is a controlled foreign corporation must, for the United States shareholder's taxable year that includes the last day on which the shareholder owns stock in the foreign corporation during the CFC year, include in gross income the amount determined under section 956 with respect to the United States shareholder for the CFC year, but only to the extent not excluded from gross income under section 959(a)(2).
(3) Personal holding company determination. For purposes of determining whether a United States shareholder that is a domestic corporation is a personal holding company under section 542 and § 1.542-1, the character of the amount includible in gross income of such domestic corporation under this paragraph (b) is determined as if such amount were realized directly by such domestic corporation from the source from which it is realized by the controlled foreign corporation.
(4) Cross references. See § 1.957-2(a) for a special limitation on the amount of subpart F income in the case of a controlled foreign corporation described in section 957(b) (involving insurance income). See section 970(a) and § 1.970-1 for rules that reduce subpart F income of controlled foreign corporations that are export trade corporations.
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(d) Certain taxable year determinations —(1) Required closing of foreign corporation's taxable year —(i) In general. If a status change event occurs with respect to a foreign corporation, the taxable year of the foreign corporation closes for all purposes of the Internal Revenue Code (and, therefore, as to all shareholders of the foreign corporation) under this paragraph (d)(1) as of the end of the day on which the status change event occurs, unless the taxable year otherwise closes as of such day under another provision of the Internal Revenue Code.
(ii) Status change event. A status change event occurs if a foreign corporation becomes or ceases to be a controlled foreign corporation. For purposes of paragraph (d)(1)(i) of this section, in the case of a foreign corporation becoming a controlled foreign corporation, the status change event occurs on the last day that the foreign corporation is not a controlled foreign corporation, and in the case of a foreign corporation ceasing to be a controlled foreign corporation, the status change event occurs on the last day that the foreign corporation is a controlled foreign corporation.
(iii) Special rules for domestic partnerships and options. Solely for purposes of determining whether a status change event occurs with respect to a foreign corporation—
(A) § 1.958-1(d)(1) is applied without regard to the exceptions in § 1.958-1(d)(2)(i) and (ii), and
(B) Section 318(a)(4) and § 1.958-2(e) do not apply.
(2) Elective closing of controlled foreign corporation's taxable year —(i) In general. If a significant ownership variance occurs with respect to a controlled foreign corporation, all the controlling section 958(a) U.S. shareholders of the controlled foreign corporation may elect to close the controlled foreign corporation's taxable year for all purposes of the Internal Revenue Code (and, therefore, as to all shareholders of the controlled foreign corporation) under this paragraph (d)(2) as of the end of the day on which the significant ownership variance occurs, unless the taxable year otherwise closes as of such day under another provision of the Internal Revenue Code. If the election is made, all persons that own stock of the controlled foreign corporation (regardless of whether they are controlling section 958(a) U.S. shareholders) must file their respective Federal income tax returns and information returns consistently with the election. The closing of the controlled foreign corporation's taxable year is treated as a change in taxable year for purposes of the notice requirement in § 1.964-1(c)(3)(iii), treating the controlling section 958(a) U.S. shareholders as the controlling domestic shareholders of the foreign corporation for this purpose. The notice described in § 1.964-1(c)(3)(iii) must be provided to all United States persons that own stock of the controlled foreign corporation during the taxable year that ends on the day on which the controlled foreign corporation's taxable year closes under this paragraph (d)(2), other than those persons required to enter into the binding agreement described in paragraph (d)(2)(iv)(B) of this section.
(ii) Significant ownership variance —(A) In general. A significant ownership variance occurs if, taking into account all specified transfers that occur pursuant to the same plan during the same taxable year of a controlled foreign corporation (such taxable year determined without regard to this paragraph (d)(2)), the percentage of the outstanding stock of the controlled foreign corporation owned by one or more section 958(a) U.S. shareholders of the controlled foreign corporation decreases, in the aggregate, by more than 50 percentage points (by vote or value), as compared to the percentage of stock of the controlled foreign corporation owned by those section 958(a) U.S. shareholders immediately before the first such specified transfer. For purposes of paragraph (d)(2)(i) of this section, the significant ownership variance occurs on the day that the last specified transfer taken into account in the significant ownership variance occurs.
(B) Specified trans fer. A specified transfer is—
( 1 ) A sale, exchange, or any other disposition of one or more shares of stock of a foreign corporation or of a partnership interest by the same person on the same date, including a redemption of stock within the meaning of section 317(b) or a change in a partner's interest in a partnership as a result of a distribution or redemption, or
( 2 ) An issuance of one or more shares of stock of a foreign corporation, an issuance of a partnership interest, or a change in a partner's interest in a partnership as a result of a contribution of property or services to the partnership, in each case occurring on the same date.
(C) Special rules for related persons and certain reorganizations. Solely for purposes of applying paragraph (d)(2)(ii)(A) of this section—
( 1 ) The total percentage of the outstanding stock of the controlled foreign corporation owned by one or more section 958(a) U.S. shareholders is not treated as decreasing to the extent that, taking into account all the specified transfers referred to in paragraph (d)(2)(ii)(A) of this section, a United States person that is a related person, immediately following the last such specified transfer, with respect to any section 958(a) U.S. shareholder whose percentage of ownership of stock of the controlled foreign corporation decreased (determined without regard to this paragraph (d)(2)(ii)(C)( 1 )), has an increase in its percentage of ownership of stock of the controlled foreign corporation; and
( 2 ) The transferor corporation and the resulting corporation (as defined in § 1.368-2(m)(1)) in a reorganization described under section 368(a)(1)(F) are treated as the same corporation.
(iii) Certain United States shareholders —(A) Section 958(a) U.S. shareholders. The section 958(a) U.S. shareholders of a controlled foreign corporation are the United States shareholders that own stock of the controlled foreign corporation.
(B) Controlling section 958(a) U.S. shareholders. The controlling section 958(a) U.S. shareholders of a controlled foreign corporation are the section 958(a) U.S. shareholders (or, if applicable, single section 958(a) U.S. shareholder) whose percentage of ownership of stock of the controlled foreign corporation decreases as part of a significant ownership variance.
(iv) Time and manner of making election —(A) Election by controlling section 958(a) U.S. shareholders. An election pursuant to this paragraph (d)(2) is made and effective if each controlling section 958(a) U.S. shareholder files the statement described in paragraph (d)(2)(v) of this section with its timely filed original Federal income tax return (including extensions) for the taxable year that includes the day the controlled foreign corporation's taxable year closes under this paragraph (d)(2). If a controlling section 958(a) U.S. shareholder is a member of a consolidated group (within the meaning of § 1.1502-1(h)), the agent for the group (within the meaning of § 1.1502-77(c)(1)) makes the election by filing the statement described in paragraph (d)(2)(v) of this section on behalf of such member.
(B) Binding agreement. Before the filing of the statement described in paragraph (d)(2)(v) of this section, all the controlling section 958(a) U.S. shareholders and all other section 958(a) U.S. shareholders of the controlled foreign corporation (if any) that own stock of the controlled foreign corporation on any day of the controlled foreign corporation's taxable year up to and including the day that the significant ownership variance occurs must enter into a written, binding agreement requiring the controlling section 958(a) U.S. shareholders to make the election described in this paragraph (d)(2). Each party to this binding agreement must be able to present the agreement to the Internal Revenue Service for inspection upon request. No binding agreement is required under this paragraph (d)(2)(iv)(B) if there is a single controlling section 958(a) U.S. shareholder and there is no other section 958(a) U.S. shareholder of the controlled foreign corporation that owns stock of the controlled foreign corporation on any day of the controlled foreign corporation's taxable year up to and including the day that the significant ownership variance occurs. In the case of a section 958(a) U.S. shareholder that owns stock of the controlled foreign corporation indirectly through one or more partnerships, the partnership that directly holds the stock of the controlled foreign corporation may enter into the binding agreement on behalf of the United States shareholder partner provided that, before the due date of the partner's original Federal income tax return, including extensions, the partner delegated the authority to the partnership to enter into the binding agreement pursuant to a written partnership agreement (within the meaning of § 1.704-1(b)(2)(ii)( h )).
(v) Form and content of statement. The statement required by paragraph (d)(2)(iv) of this section must be titled “Elective Section 951 Year-Closing Statement.” The statement must—
(A) Identify (by name and tax identification number, if any) the controlled foreign corporation, the controlling section 958(a) U.S. shareholders, and each other section 958(a) U.S. shareholder of the controlled foreign corporation that is party to the binding agreement referred to in paragraph (d)(2)(iv)(B) of this section;
(B) Describe the significant ownership variance to which the election applies and provide the date on which the controlled foreign corporation's taxable year closes;
(C) State that each controlling section 958(a) U.S. shareholder and all other section 958(a) U.S. shareholders of the controlled foreign corporation described in paragraph (d)(2)(iv)(B) of this section have entered into a written, binding agreement to elect to close the controlled foreign corporation's taxable year in accordance with paragraph (d)(2)(iv)(B) of this section; and
(D) Be filed in the manner, if any, prescribed by forms, publications, or other guidance published in the Internal Revenue Bulletin.
(vi) Consistency requirement. If significant ownership variances occur with respect to multiple controlled foreign corporations pursuant to a plan or series of related transactions, the election described in this paragraph (d)(2) may be made only if it is made with respect to each of the controlled foreign corporations.
(3) Foreign income taxes —(i) Allocation to taxable years. If a foreign corporation's taxable year closes under paragraph (d)(1) or (d)(2) of this section and the foreign corporation's taxable year under foreign law does not close at the end of the date on which the foreign corporation's taxable year closes (the closing date), a portion of the foreign income tax with respect to such foreign taxable year that accrues in the taxable year following the closing date is allocated to the taxable year ending with the closing date. The allocation is made based on the portion of the taxable income of the foreign corporation (as determined under foreign law) for the foreign taxable year that is attributable under the principles of § 1.1502-76(b) (without regard to § 1.1502-76(b)(2)(ii)) to the period of the foreign taxable year ending with the closing date. This paragraph (d)(3) applies to all foreign income taxes for which the foreign corporation is the taxpayer under § 1.901-2(f) (other than withholding taxes as defined in section 901(k)(1)(B)). Foreign income taxes allocated to a taxable year under this paragraph (d)(3) are treated as accrued by the foreign corporation as of the close of that taxable year for all purposes of the Internal Revenue Code except for section 986(a).
(ii) Allocation and apportionment to statutory and residual groupings. The portion of the foreign income tax allocated under paragraph (d)(3)(i) of this section to the taxable year ending with the closing date is allocated and apportioned to statutory and residual groupings under § 1.861-20 by treating the foreign taxable income attributed under paragraph (d)(3)(i) of this section to the period of the foreign taxable year ending with the closing date as the foreign income included in the base on which the tax is imposed. The portion of the foreign income tax that remains in the taxable year following the closing date is allocated and apportioned to statutory and residual groupings under § 1.861-20 by treating the remaining foreign taxable income as the foreign income included in the base on which the tax is imposed.
(4) Examples. The following examples illustrate the application of this paragraph (d).
(i) Example 1: Status change event —(A) Facts. FC is a foreign corporation with a calendar taxable year. As of January 1 of Year 1, 100 percent of the stock of FC is owned by USP, a domestic corporation. On June 30 of Year 1, USP sells all its stock in FC to Individual A, a nonresident alien individual.
(B) Analysis. Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1. Individual A owns the stock of FC on July 1 of Year 1. FC is therefore a controlled foreign corporation through June 30 of Year 1 and is not a controlled foreign corporation on July 1 of Year 1. Under paragraph (d)(1)(ii) of this section, a status change event occurs with respect to FC on June 30 of Year 1, which is the last day that FC is a controlled foreign corporation. Therefore, under paragraph (d)(1)(i) of this section, the taxable year of FC closes for all purposes of the Internal Revenue Code as of the end of the day on June 30 of Year 1.
(ii) Example 2: Significant ownership variance —(A) Facts. The facts are the same as in paragraph (d)(4)(i)(A) of this section ( Example 1 ), except that Individual A is a United States citizen. USP and Individual A are not related persons.
(B) Analysis. Paragraph (d)(1) of this section does not apply to the sale of stock of FC by USP to Individual A because the sale does not result in FC ceasing to be a controlled foreign corporation. Under paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP to Individual A is a specified transfer. Under paragraph (d)(2)(ii)(B) of this section, USP is a section 958(a) U.S. shareholder of FC prior to the sale. Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1, and Individual A owns the stock of FC on July 1 of Year 1. Under paragraph (d)(2)(ii)(A) of this section, USP's sale of all the stock of FC to Individual A results in a significant ownership variance that occurs on June 30 of Year 1. A significant ownership variance occurs because, taking into account the sale, the percentage of the outstanding stock of FC owned by USP decreases, in the aggregate, by more than 50 percentage points (by vote or value), as compared to the percentage of stock of FC owned by USP immediately before the sale (from 100 percent to 0 percent). Under paragraph (d)(2)(iii)(B) of this section, USP is the single controlling section 958(a) U.S. shareholder of FC. Therefore, pursuant to paragraph (d)(2)(i) of this section, USP may elect to close the taxable year of FC for all purposes of the Internal Revenue Code as of the end of the day on June 30 of Year 1.
(iii) Example 3: Transfer between related persons —(A) Facts. The facts are the same as in paragraph (d)(4)(ii)(A) of this section ( Example 2 ), except that USP and Individual A are related persons.
(B) Analysis. Paragraph (d)(1) of this section does not apply to the sale of stock of FC by USP to Individual A because the sale does not result in FC ceasing to be a controlled foreign corporation. Under paragraph (d)(2)(ii)(B) of this section, the sale of stock of FC by USP to Individual A is a specified transfer. Under paragraph (d)(2)(iii)(A) of this section, USP is a section 958(a) U.S. shareholder of FC prior to the sale. Under paragraph (f)(1) of this section, USP owns the stock of FC through June 30 of Year 1, and Individual A owns the stock of FC on July 1 of Year 1. Under paragraph (d)(2)(ii)(C) of this section, solely for purposes of applying paragraph (d)(2)(ii)(A) of this section, the total percentage of the outstanding stock of FC owned by one or more section 958(a) U.S. shareholders is not treated as decreasing as a result of the sale because Individual A is a United States person that is a related person, immediately following the sale, with respect to USP, and the sale results in an increase in Individual A's percentage of ownership of stock of FC by 100 percent (entirely offsetting the 100 percent decrease in USP's percentage of ownership of stock of FC). Therefore, the sale does not give rise to a significant ownership variance and USP may not elect to close the taxable year of FC.
(e) Pro rata share of subpart F income defined— (1) Overview. This paragraph (e) determines a United States shareholder's pro rata share of a controlled foreign corporation's subpart F income for a CFC year. Paragraph (e)(2) of this section contains the rules for determining a United States shareholder's pro rata share of subpart F income. Paragraph (e)(3) of this section sets forth an anti-abuse rule, and paragraph (e)(4) of this section contains examples.
(2) In general. A United States shareholder's pro rata share of a controlled foreign corporation's subpart F income for a CFC year is the portion of the subpart F income attributable to the stock of the foreign corporation that the United States shareholder owns during the period of the CFC year in which the United States shareholder owns the stock, the shareholder is a United States shareholder of the foreign corporation, and the foreign corporation is a controlled foreign corporation, as determined under the rules of this paragraph (e)(2).
(i) One class of stock with constant number of shares outstanding —(A) Daily proration. Subject to paragraph (e)(2)(i)(B) of this section, if the controlled foreign corporation has only one class of stock outstanding at all times during the CFC year and there is no change in the number of outstanding shares of the controlled foreign corporation during the CFC year, a United States shareholder's pro rata share of the controlled foreign corporation's subpart F income is equal to the subpart F income of the controlled foreign corporation for the CFC year multiplied by the product of—
( 1 ) A fraction, the numerator of which is the number of shares of the controlled foreign corporation the United States shareholder owned during the CFC year, and the denominator of which is the number of shares of the controlled foreign corporation outstanding for the CFC year, and
( 2 ) A fraction, the numerator of which is the number of days the United States shareholder owned the shares of the controlled foreign corporation while a United States shareholder of the foreign corporation and while the foreign corporation was a controlled foreign corporation during the CFC year, and the denominator of which is the number of days in the CFC year.
(B) Stock with different ownership periods during CFC year —( 1 ) In general. If a United States shareholder owns shares in more than one CFC year block during a CFC year (for example, because the United States shareholder acquires or disposes of a portion of its shares during the CFC year), paragraph (e)(2)(i)(A) of this section is applied separately to each CFC year block, and the United States shareholder's pro rata share of the controlled foreign corporation's subpart F income for the CFC year is equal to the total amount determined with respect to all of its CFC year blocks. See paragraph (e)(4)(iii) of this section ( Example 2 ).
( 2 ) Definition of CFC year block. The term CFC year block means a group of shares within a class of stock of a controlled foreign corporation that a United States shareholder owns for the same period during a CFC year.
(ii) More than one class of stock with constant number of shares outstanding in each class. If a controlled foreign corporation has more than one class of stock outstanding during a CFC year and there is no change in the number of outstanding shares in any class of the controlled foreign corporation's stock during the CFC year, paragraph (e)(2)(i) of this section is applied separately to each class of stock after first allocating the controlled foreign corporation's subpart F income for the CFC year among the classes of stock. For this purpose, the amount of subpart F income for the CFC year allocated to a class of stock of a controlled foreign corporation is the amount that bears the same ratio to the corporation's subpart F income for the CFC year as the amount of the corporation's allocable earnings and profits that would be distributed with respect to the class of stock bears to the total amount of the corporation's allocable earnings and profits that would be distributed with respect to all the stock of the corporation if all the allocable earnings and profits of the corporation for the CFC year (not reduced by actual distributions during the year) were distributed (hypothetical distribution) on the last day of the CFC year.
(A) Definition of allocable earnings and profits. The term allocable earnings and profits means, with respect to a controlled foreign corporation for a CFC year, the amount that is the greater of—
( 1 ) The earnings and profits of the corporation for the CFC year determined under section 964, and
( 2 ) The sum of the subpart F income (as determined under section 952 after the application of section 951A(b)(2)(B)(ii) and § 1.951A-6(b)) of the corporation for the CFC year and the tested income of the corporation for the CFC year.
(B) Hypothetical distribution analysis. The amount of the controlled foreign corporation's allocable earnings and profits distributed in the hypothetical distribution with respect to each class of stock is determined based on the distribution rights of the stock during the CFC year. Subject to paragraphs (e)(2)(ii)(C) and (D), and (e)(3), of this section, the distribution rights of a class of stock are determined taking into account all facts and circumstances related to the economic rights and interest in the allocable earnings and profits of the corporation of each class, including the terms of the class of stock, any agreement among the shareholders and, if and to the extent appropriate, the relative fair market value of shares of stock. For purposes of this paragraph (e)(2)(ii)(B), facts and circumstances do not include actual distributions (including distributions by redemption) or any amount treated as a dividend under any other provision of subtitle A of the Internal Revenue Code (for example, under section 78, 356(a)(2), 367(b), or 1248) made during the CFC year.
(C) Special rules —( 1 ) Redemptions, liquidations, and returns of capital. No amount of allocable earnings and profits is distributed in the hypothetical distribution with respect to a particular class of stock based on the terms of the class of stock of the controlled foreign corporation or any agreement or arrangement with respect thereto that would result in a redemption (even if such redemption would be treated as a distribution of property to which section 301 applies pursuant to section 302(d)), a distribution in liquidation, or a return of capital.
( 2 ) Certain cumulative preferred stock. If a controlled foreign corporation has outstanding a class of redeemable preferred stock with cumulative dividend rights and dividend arrearages on such stock do not compound at least annually at a rate that equals or exceeds the applicable Federal rate (as defined in section 1274(d)(1)) that applies on the date the stock is issued for the term from such issue date to the mandatory redemption date based on a comparable compounding assumption (the relevant AFR), the amount of the corporation's allocable earnings and profits distributed in the hypothetical distribution with respect to the class of stock may not exceed the amount of dividends actually paid during the CFC year with respect to the class of stock plus the present value at the end of the CFC year of the unpaid current dividends with respect to the class determined using the relevant AFR and assuming the dividends will be paid at the mandatory redemption date. For purposes of this paragraph (e)(2)(ii)(C)( 2 ), if the class of preferred stock does not have a mandatory redemption date, the mandatory redemption date is the date that the class of preferred stock is expected to be redeemed based on all facts and circumstances.
( 3 ) Dividend arrearages. If there is an arrearage in dividends for prior taxable years with respect to a class of preferred stock of a controlled foreign corporation, an amount of the corporation's allocable earnings and profits is distributed in the hypothetical distribution to the class of preferred stock by reason of the arrearage only to the extent the arrearage exceeds the accumulated earnings and profits of the controlled foreign corporation remaining from prior CFC years beginning after December 31, 1962, as of the beginning of the CFC year, or the date on which such stock was issued, whichever is later (the applicable date). If there is an arrearage in dividends for prior CFC years with respect to more than one class of preferred stock, the previous sentence is applied to each class in order of priority, except that the accumulated earnings and profits remaining after the applicable date are reduced by the allocable earnings and profits necessary to satisfy arrearages with respect to classes of stock with a higher priority. For purposes of this paragraph (e)(2)(ii)(C)( 3 ), the amount of any arrearage with respect to stock described in this paragraph (e)(2)(ii)(C)( 3 ) is determined in the same manner as the present value of unpaid current dividends on such stock under paragraph (e)(2)(ii)(C)( 2 ) of this section.
(D) Restrictions or other limitations on distributions —( 1 ) In general. A restriction or other limitation on distributions of an amount of earnings and profits by a controlled foreign corporation is not taken into account in determining the amount of the corporation's allocable earnings and profits distributed in the hypothetical distribution to a class of stock of the controlled foreign corporation.
( 2 ) Definition of restriction or other limitation. For purposes of paragraph (e)(2)(ii)(D)( 1 ) of this section, a restriction or other limitation on distributions includes any limitation that has the effect of limiting the distribution of an amount of earnings and profits by a controlled foreign corporation with respect to a class of stock of the corporation, other than currency or other restrictions or limitations imposed under the laws of any foreign country as provided in section 964(b).
( 3 ) Exception for certain preferred distributions. For purposes of paragraph (e)(2)(ii)(D)( 1 ) of this section, the right to receive periodically a fixed amount (whether determined by a percentage of par value, a reference to a floating coupon rate, a stated return expressed in terms of a certain amount of U.S. dollars or foreign currency, or otherwise) with respect to a class of stock the distribution of which is a condition precedent to a further distribution of earnings and profits that year with respect to any class of stock (not including a distribution in partial or complete liquidation) is not a restriction or other limitation on the distribution of earnings and profits by a controlled foreign corporation.
( 4 ) Illustrative list of restrictions and limitations. Except as provided in paragraph (e)(2)(ii)(D)( 3 ) of this section, restrictions or other limitations on distributions include, but are not limited to—
( i ) An arrangement that restricts the ability of a controlled foreign corporation to pay dividends on a class of stock of the corporation until a condition or conditions are satisfied (for example, until another class of stock is redeemed);
( ii ) A loan agreement entered into by a controlled foreign corporation that restricts or otherwise affects the ability to make distributions on its stock until certain requirements are satisfied; or
( iii ) An arrangement that conditions the ability of a controlled foreign corporation to pay dividends to its shareholders on the financial condition of the corporation.
(iii) Changes in number of shares outstanding. If the number of shares within any class of stock of a controlled foreign corporation outstanding on each day of a CFC year changes (for example, because of an issuance of new shares or a redemption of outstanding shares), a United States shareholder's pro rata share of subpart F income is determined under the rules provided in paragraphs (e)(2)(i) and (ii) of this section as modified by this paragraph (e)(2)(iii).
(A) Weighted average share count. For purposes of applying paragraph (e)(2)(i) of this section, a United States shareholder's pro rata share of subpart F income is determined by substituting a weighted average share count for the number of the controlled foreign corporation's shares outstanding during the CFC year, which is equal to the sum of the number of shares outstanding on each day of the CFC year divided by the number of days in the CFC year.
(B) Multiple classes of stock. For purposes of applying paragraph (e)(2)(ii) of this section, a controlled foreign corporation's subpart F income for the CFC year is allocated among classes of stock based on the allocable earnings and profits that would be distributed to a class of stock in the hypothetical distribution if a weighted average share count of the class was outstanding on each day of the CFC year and, thus, on the last day of the CFC year when the hypothetical distribution occurs.
(3) Transactions and arrangements with a principal purpose of changing pro rata shares. Appropriate adjustments must be made to the allocation of allocable earnings and profits that would be distributed (without regard to this paragraph (e)(3)) in a hypothetical distribution with respect to any share of stock to disregard the effect on the hypothetical distribution of any transaction or arrangement that is undertaken as part of a plan a principal purpose of which is the avoidance of Federal income taxation by changing the amount of allocable earnings and profits that would be distributed in any hypothetical distribution with respect to such share. This paragraph (e)(3) also applies for purposes of the pro rata share rules described in § 1.951A-1(d) that reference this paragraph (e).
(4) Examples. The following examples illustrate the application of this paragraph (e).
(i) Facts. Except as otherwise stated, the following facts are assumed for purposes of the examples:
(A) FC1 is a controlled foreign corporation.
(B) USP1 and USP2 are domestic corporations that are United States shareholders of FC1.
(C) Individual A is a nonresident alien individual, and FC2 is a foreign corporation that is not a controlled foreign corporation.
(D) All persons use the calendar year as their taxable year.
(E) Year 1 has 365 days.
(F) Any ownership of stock of FC1 by any shareholder is for all of Year 1.
(G) The common shareholders of FC1 are entitled to dividends when declared by FC1's board of directors.
(H) There are no accrued but unpaid dividends with respect to preferred shares, the preferred stock is not described in paragraph (e)(2)(ii)(C)( 2 ) of this section, and common shares have positive liquidation value.
(I) There are no other facts and circumstances related to the economic rights and interest of any class of stock in the allocable earnings and profits of a foreign corporation, and no transaction or arrangement was entered into as part of a plan a principal purpose of which is the avoidance of Federal income taxation.
(J) FC1 has neither tested income nor tested loss.
(K) None of the transactions described constitute a status change event or a significant ownership variance.
(ii) Example 1: One class of stock with constant number of shares outstanding —(A) Facts. FC1 has outstanding 100 shares of one class of stock. USP1 owns 60 shares of FC1. USP2 owns 40 shares of FC1. For Year 1, FC1 earns $100x of subpart F income.
(B) Analysis. FC1 has one class of stock and the number of shares outstanding does not change during Year 1, which is a CFC year. Therefore, USP1's and USP2's pro rata shares of FC1's subpart F income for the CFC year are determined under paragraph (e)(2)(i) of this section. For Year 1, USP1's pro rata share of FC1's subpart F income is $60x, which is equal to $100x of subpart F income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares that USP1 owned (60) and the denominator is the number of shares of FC1 outstanding (100) (60 percent). For the second fraction, the numerator is the number of days in the CFC year that USP1 owned the shares while USP1 was a United States shareholder of FC1 and FC1 was a controlled foreign corporation (365) and the denominator is the number of days in the CFC year of FC1 (365) (100 percent). For Year 1, USP2's pro rata share of FC1's subpart F income is $40x, which is equal to $100x of subpart F income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares that USP2 owned (40) and the denominator is the number of shares of FC1 outstanding (100) (40 percent). For the second fraction, the numerator is the number of days in the CFC year that USP2 owned the shares while USP2 was a United States shareholder of FC1 and FC1 was a controlled foreign corporation (365) and the denominator is the number of days in the CFC year of FC1 (365) (100 percent).
(iii) Example 2: Single class of stock with constant number of shares outstanding during the CFC year, and a share transfer during the CFC Year —(A) Facts. The facts are the same as in paragraph (e)(4)(ii)(A) of this section ( Example 1 ), except that on June 30 of Year 1 USP2 sells 20 shares of FC1 to Individual A.
(B) Analysis. The determination of USP1's pro rata share of the subpart F income of FC1 is the same as in paragraph (e)(4)(ii)(B) of this section (the analysis in Example 1 ). Under paragraph (e)(2)(i)(B) of this section, USP2's pro rata share of FC1's subpart F income is determined by reference to the two separate CFC year blocks that USP2 owns during the CFC year. USP2 owns 40 shares of FC1 from January 1 through June 30 of the CFC year (the first CFC year block), and 20 shares of FC1 from July 1 through December 31 of the CFC year (the second CFC year block). USP2's pro rata share of subpart F income with respect to the first CFC year block is $19.84x, which is equal to $100x of subpart F income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares USP2 owned in the first CFC year block (40) and the denominator is the number of shares of FC1 outstanding (100) (40 percent). For the second fraction, the numerator is the number of days in the CFC year that USP2 owned the shares in the first CFC year block while USP2 was a United States shareholder of FC1 and FC1 was a controlled foreign corporation (181) and the denominator is the number of days in the CFC year (365) (49.6 percent). USP2's pro rata share of subpart F income with respect to the second CFC year block is $10.08x, which is equal to $100x of subpart F income multiplied by the product of two fractions. For the first fraction, the numerator is the number of shares USP2 owned in the second CFC year block (20) and the denominator is the number of shares of FC1 outstanding (100) (20 percent). For the second fraction, the numerator is the number of days in the CFC year that USP2 owned the shares in the second CFC year block while USP2 was a United States shareholder of FC1 and FC1 was a controlled foreign corporation (184) and the denominator is the number of days in the CFC year (365) (50.4 percent). Accordingly, for Year 1, USP2's pro rata share of the subpart F income of FC1 is $29.92x ($19.84x + $10.08x).
(iv) Example 3: Common and preferred stock —(A) Facts. FC1 has outstanding 70 shares of common stock and 30 shares of 4% nonparticipating, voting preferred stock with a par value of $10x per share. USP1 owns all the common shares. Individual A owns all the preferred shares. For Year 1, FC1 has $100x of earnings and profits and $50x of subpart F income.
(B) Analysis. FC1 has more than one class of stock and the number of shares outstanding in each class does not change during Year 1, which is a CFC year. Therefore, USP1's pro rata share of FC1's subpart F income for the CFC year is determined under paragraph (e)(2)(i) of this section after applying the hypothetical distribution in paragraph (e)(2)(ii) of this section to determine the amount of subpart F income allocated to the common and preferred stock of FC1. The distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. Under paragraph (e)(2)(ii) of this section, the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to Individual A's preferred shares is $12x (0.04 × $10x × 30) and with respect to USP1's common shares is $88x ($100x−$12x). Accordingly, under paragraph (e)(2)(ii) of this section, $6x of FC1's subpart F income is allocated to the preferred shares ($50x × ($12x/$100x)), and $44x of FC1's subpart F income is allocated to the common shares ($50x × ($88x/$100x)) for Year 1. As a result, under paragraph (e)(2)(i) of this section, because USP1 owned all the common shares, USP1's pro rata share of FC1's subpart F income is $44x for Year 1.
(v) Example 4: Mid-year redemption of preferred stock— (A) Facts. The facts are the same as in paragraph (e)(4)(iv)(A) of this section ( Example 3 ), except on June 30 of Year 1, FC1 redeems 15 shares of the preferred stock owned by Individual A.
(B) Analysis. The redemption of the 15 shares of preferred stock of FC1 owned by Individual A is not taken into account in determining the distribution rights of the preferred stock under paragraph (e)(2)(ii)(B) of this section, and the distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. Under paragraph (e)(2)(ii) of this section, the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution is determined based on the allocable earnings and profits that would be distributed with respect to the preferred shares if a weighted average share count of preferred shares was outstanding on each day of the CFC year and, thus, on the last day of the CFC year. The weighted average share count of the preferred shares is 22.44 ((15 × 365 + 15 × 181)/365). The allocable earnings and profits that would be distributed to Individual A's preferred shares based on the weighted average share count is $8.98x (0.04 × $10x × 22.44). The allocable earnings and profits that would be distributed with respect to USP1's common shares is $91.02x ($100x−$8.98x). Accordingly, under paragraph (e)(2)(ii) of this section, $45.51x of FC1's subpart F income is allocated to USP1's common shares ($50x × ($91.02x/$100x)), and USP1's pro rata share of FC1's subpart F income under paragraph (e)(2)(i) of this section is $45.51 for Year 1.
(vi) Example 5: Restriction based on cumulative income —(A) Facts. FC1 has outstanding 10 shares of common stock and 400 shares of 2% nonparticipating, voting preferred stock with a par value of $1x per share. USP1 owns all the common shares. FC2 owns all the preferred shares. USP1 and FC2 cause the governing documents of FC1 to provide that no dividends may be paid to the common shareholders until FC1 cumulatively earns $100,000x of income. For Year 1, FC1 has $50x of earnings and profits and $50x of subpart F income.
(B) Analysis. The agreement restricting FC1's ability to pay dividends to common shareholders until FC1 cumulatively earns $100,000x of income is a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. Therefore, the restriction is disregarded for purposes of determining the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution to a class of stock. The distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. Under paragraph (e)(2)(ii) of this section, the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to FC2's preferred shares is $8x (0.02 × $1x × 400) and with respect to USP1's common shares is $42x ($50x−$8x). Accordingly, under paragraphs (e)(2)(i) and (ii) of this section, USP1's pro rata share of FC1's subpart F income is $42x for Year 1 ($50x × ($42x/$50x)).
(vii) Example 6: Redemption rights —(A) Facts. FC1 has outstanding 40 shares of common stock and 10 shares of 4% nonparticipating, preferred stock with a par value of $50x per share. Pursuant to the terms of the preferred stock, FC1 has the right to redeem the preferred stock at any time, in whole or in part. FC2 owns all the preferred shares. USP1, wholly owned by FC2, owns all the common shares. Pursuant to the governing documents of FC1, no dividends may be paid to the common shareholders while the preferred stock is outstanding. For Year 1, FC1 has $100x of earnings and profits and $100x of subpart F income.
(B) Analysis. The agreement restricting FC1's ability to pay dividends to common shareholders while the preferred stock is outstanding is a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. Therefore, the restriction is disregarded for purposes of determining the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution to a class of stock. Under paragraph (e)(2)(ii)(C)( 1 ) of this section, no amount of allocable earnings and profits is distributed in the hypothetical distribution to the preferred shareholders in respect of FC1's right to redeem the preferred shares. This is the case regardless of the restriction on paying dividends to the common shareholders while the preferred stock is outstanding, and regardless of the fact that a redemption of FC2's preferred shares would be treated as a distribution to which section 301 applies under section 302(d) (due to FC2's constructive ownership of the common shares). Thus, neither the restriction on paying dividends to the common shareholders while the preferred stock is outstanding nor FC1's redemption rights with respect to the preferred shares affects the distribution of allocable earnings and profits in the hypothetical distribution to FC1's shareholders. However, the distribution rights of the preferred shares are not a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. As a result, the amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to FC2's preferred shares is $20x (0.04 × $50x × 10) and with respect to USP1's common shares is $80x ($100x−$20x). Accordingly, under paragraphs (e)(2)(i) and (ii) of this section, USP1's pro rata share of FC1's subpart F income is $80x for Year 1 ($100x × ($80x/$100x)).
(viii) Example 7: Shareholder owns common and preferred stock —(A) Facts. FC1 has outstanding 40 shares of common stock and 60 shares of 6% nonparticipating, nonvoting preferred stock with a par value of $100x per share. USP1 owns 30 shares of the common stock and 15 shares of the preferred stock during Year 1. The remaining 10 shares of common stock and 45 shares of preferred stock of FC1 are owned by Individual A. For Year 1, FC1 has $1,000x of earnings and profits and $500x of subpart F income.
(B) Analysis. The right of the holder of the preferred stock to receive 6% of par value is not a restriction or other limitation within the meaning of paragraph (e)(2)(ii)(D) of this section. The amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to FC1's preferred shares is $360x (0.06 × $100x × 60) and with respect to its common shares is $640x ($1,000x−$360x). As a result, under paragraph (e)(2)(ii) of this section, $180x of FC1's subpart F income is allocated to the preferred shares ($500x × ($360x/$1,000x)) and $320x of FC1's subpart F income is allocated to the common shares ($500x × ($640x/$1,000x)). Under paragraph (e)(2)(i) of this section, USP1's pro rata share of the subpart F income of FC1 is $285x, of which $45x is attributable to USP1's preferred shares ($180x × 15/60 × 365/365) and $240x is attributable to USP1's common shares ($320x × 30/40 × 365/365).
(ix) Example 8: Subpart F income and tested income —(A) Facts. FC1 has outstanding 700 shares of common stock and 300 shares of 4% nonparticipating, voting preferred stock with a par value of $100x per share. USP1 owns all the common shares. USP2 owns all the preferred shares. For Year 1, FC1 has $10,000x of earnings and profits, $2,000x of subpart F income, and $9,000x of tested income.
(B) Analysis —( 1 ) Hypothetical distribution. The allocable earnings and profits of FC1 determined under paragraph (e)(2)(ii)(A) of this section are $11,000x, the greater of FC1's earnings and profits as determined under section 964 ($10,000x) or the sum of FC1's subpart F income and tested income ($2,000x + $9,000x). The amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to USP2's preferred shares is $1,200x (0.04 × $100x × 300) and with respect to USP1's common shares is $9,800x ($11,000x−$1,200x).
( 2 ) Pro rata share of subpart F income. Under paragraph (e)(2)(ii) of this section, $1,782x of FC1's subpart F income is allocated to the common shares ($2,000x × ($9,800x/$11,000x)) and $218x of FC1's subpart F income is allocated to the preferred shares ($2,000x × ($1,200x/$11,000x)). Accordingly, under paragraph (e)(2)(i) of this section, for Year 1, USP1's pro rata share of FC1's subpart F income is $1,782x ($1,782x × 700/700 × 365/365), and USP2's pro rata share of FC1's subpart F income is $218x ($218x 300/300 × 365/365).
( 3 ) Pro rata share of tested income. Under § 1.951A-1(d)(2)(i) and paragraph (e)(2)(ii) of this section, $8,018x of FC1's tested income is allocated to the common shares ($9,000x × ($9,800x/$11,000x)) and $982x of FC1's tested income is allocated to the preferred shares ($9,000x × ($1,200x/$11,000x)). Accordingly, under § 1.951A-1(d)(2)(i) and paragraph (e)(2)(i) of this section, for Year 1, USP1's pro rata share of FC1's tested income is $8,018x ($8,018x × 700/700 × 365/365), and USP2's pro rata share of FC1's tested income is $982x ($982x × 300/300 × 365/365).
(x) Example 9: Subpart F income and tested loss —(A) Facts. The facts are the same as in paragraph (e)(4)(ix)(A) of this section ( Example 8 ), except that for Year 1, FC1 has $8,000x of earnings and profits, $10,000x of subpart F income (without regard to the limitation in section 952(c)(1)(A)), and $2,000x of tested loss. Under section 951A(b)(2)(B)(ii) and § 1.951A-6(b), the earnings and profits of FC1 are increased for purposes of section 952(c)(1)(A) by the amount of FC1's tested loss. Accordingly, after the application of section 951A(b)(2)(B)(ii) and § 1.951A-6(b), the subpart F income of FC1 is $10,000x.
(B) Analysis —( 1 ) Pro rata share of subpart F income. The allocable earnings and profits determined under paragraph (e)(2)(ii) of this section are $10,000x, the greater of the earnings and profits of FC1 determined under section 964 ($8,000x) or the sum of FC1's subpart F income and tested income ($10,000x + $0). The amount of FC1's allocable earnings and profits distributed in the hypothetical distribution with respect to USP2's preferred shares is $1,200x (0.04 × $100x × 300) and with respect to USP1's common shares is $8,800x ($10,000x−$1,200x). Under paragraph (e)(2)(ii) of this section, $1,200x of FC1's subpart F income is allocated to the preferred shares ($10,000x × ($1,200x/$10,000x)) and $8,800x of FC1's subpart F income is allocated to the common shares ($10,000x × ($8,800x/$10,000x)). Accordingly, under paragraph (e)(2)(i) of this section, for Year 1, USP1's pro rata share of FC1's subpart F income is $8,800x ($8,800x × 700/700 × 365/365) and USP2's pro rata share of FC1's subpart F income is $1,200x ($1,200x × 300/300 × 365/365).
( 2 ) Pro rata share of tested loss. For purposes of paragraph (e)(2)(ii) of this section, the allocable earnings and profits determined under § 1.951A-1(d)(3)(i)(B) are $2,000x, the amount of FC1's tested loss. Under § 1.951A-1(d)(3)(i)(C), the entire $2,000x of tested loss is allocated in the hypothetical distribution to USP1's common shares. Accordingly, under § 1.951A-1(d)(3)(i)(A) and paragraph (e)(2)(i) of this section, USP1's pro rata share of the tested loss is $2,000x.
(f) Determination of holding period— (1) In general. For purposes of sections 951 through 964, the holding period of an asset (including stock of a controlled foreign corporation) is determined by excluding the day on which the asset is acquired and including the day on which the asset is disposed of. Thus, for example, in determining the period that stock of a controlled foreign corporation is owned, the day on which the stock is directly or indirectly acquired is excluded and the day on which the stock is directly or indirectly disposed of is included.
(2) Example: Period of stock ownership— (i) Facts. On June 30 of Year 1, USP, a domestic corporation, acquires 70 of the 100 shares of the only class of stock of FC, a foreign corporation, from Individual B, a nonresident alien individual who until such time owns all 100 shares of FC. USP sells 10 shares and 60 shares of stock of FC on November 30 and December 31 of Year 1, respectively, to Individual B, a nonresident alien individual.
(ii) Analysis. Under paragraph (f)(1) of this section, FC is a controlled foreign corporation for the period beginning July 1 of Year 1 and extending through December 31 of Year 1. As to the 10 shares of stock sold on November 30 of Year 1, USP owns the shares from July 1 of Year 1 through November 30 of Year 1. As to the remaining 60 shares of stock, USP owns the shares beginning July 1 of Year 1 through December 31 of Year 1.
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(h) Definitions. The following definitions apply for purposes of this section.
Allocable earnings and profits. The term allocable earnings and profits has the meaning provided in paragraph (e)(2)(ii)(A) of this section.
CFC year. The term CFC year means a taxable year of a foreign corporation in which the foreign corporation is a controlled foreign corporation at any time during the taxable year.
CFC year block. The term CFC year block has the meaning provided in paragraph (e)(2)(i)(B)( 2 ) of this section.
Controlled foreign corporation. The term controlled foreign corporation has the meaning provided in section 957(a) (or, if applicable, section 957(b)).
Controlling section 958(a) U.S. shareholders. The term controlling section 958(a) U.S. shareholders has the meaning provided in paragraph (d)(2)(iii)(B) of this section.
Hypothetical distribution. The term hypothetical distribution has the meaning provided in paragraph (e)(2)(ii) of this section.
Own. The term own (or ownership or owned), when used with respect to stock of a foreign corporation, means to own the stock directly or indirectly within the meaning of section 958(a) and § 1.958-1(a). See also § 1.958-1(d) (except as provided in § 1.958-1(d)(2), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section 958(a) for purposes of section 951 and for purposes of any provision that specifically applies by reference to section 951 or the regulations in this part under section 951, and the domestic partnership is treated as a foreign partnership under section 958(a)(2) in determining the persons that own stock of the foreign corporation within the meaning of section 958(a)).
Related persons. The term related persons means persons that are related within the meaning of section 267(b), as applied without regard to section 267(c)(3).
Section 958(a) U.S. shareholders. The term section 958(a) U.S. shareholders has the meaning provided in paragraph (d)(2)(iii)(A) of this section.
Significant ownership variance. The term significant ownership variance has the meaning provided in paragraph (d)(2)(ii) of this section.
Specified transfer. The term specified transfer has the meaning provided in paragraph (d)(2)(ii)(B) of this section.
Status change event. The term status change event has the meaning provided in paragraph (d)(1)(ii) of this section.
Subpart F income. The term subpart F income has the meaning provided in section 952.
Tested income. The term tested income has the meaning provided in section 951A(b)(2)(A).
Tested loss. The term tested loss has the meaning provided in section 951A(b)(2)(B)(i).
United States shareholder. The term United States shareholder has the meaning provided in paragraph (g) of this section.
(i) Applicability date. This section applies to taxable years of foreign corporations beginning after December 31, 2025, and to taxable years of United States shareholders for which such taxable years of those foreign corporations are relevant. For rules applicable to taxable years of foreign corporations beginning on or before December 31, 2025, and to taxable years of United States shareholders in which or with which such taxable years end, see 26 CFR 1.951-1 as contained in 26 CFR part 1 edition revised as of April 1, 2026.