Par. 5. Section 1.951-4 is added to read as follows:
(a) Scope. This section sets forth the rules for applying the transition rule for dividends in section 70354(c)(2) of Public Law 119-21, 139 Stat. 72 (July 4, 2025) (OBBBA). Paragraph (b) of this section provides the general rule for dividends subject to the transition rule. Paragraph (c) of this section provides the meaning of dividend paid or deemed paid. Paragraph (d) of this section provides the meaning of United States person subject to Federal income tax. Paragraph (e) of this section provides the meaning of taxable income. Paragraph (f) of this section provides rules for determining whether a dividend increases taxable income. Paragraph (g) of this section provides rules for the application of this section to dividends paid or deemed paid to partnerships. Paragraph (h) of this section provides certain substantiation requirements for establishing that a dividend increases the taxable income of a United States person subject to Federal income tax. Paragraph (i) of this section provides the applicability date for this section.
(b) Transition rule. For purposes of this section, the term transition rule means the rule provided in section 70354(c)(2) of the OBBBA and this paragraph (b). Under the transition rule, for purposes of applying section 951(a)(2)(B), as in effect before amendment by the OBBBA, a dividend paid or deemed paid by a controlled foreign corporation with respect to stock of the controlled foreign corporation is not treated as a dividend to the extent that—
(1) Either—
(i) The dividend was paid or deemed paid on or before June 28, 2025, during the controlled foreign corporation's taxable year that includes June 28, 2025, and the United States shareholder that owned (within the meaning of section 958(a)) that stock on the last day of that taxable year did not own (within the meaning of section 958(a)) that stock during the portion of the taxable year ending on June 28, 2025; or
(ii) The dividend was paid or deemed paid after June 28, 2025, and before the controlled foreign corporation's first taxable year beginning after December 31, 2025; and
(2) The dividend does not increase the taxable income of a United States person subject to Federal income tax.
(c) Dividend paid or deemed paid. For purposes of this section, any amount that would be treated, without regard to this section, as a distribution received by a person as a dividend under section 951(a)(2)(B), as in effect before the amendments to section 951(a) made by the OBBBA, is treated as a dividend paid or deemed paid.
(d) United States person subject to Federal income tax. For purposes of this section, a United States person subject to Federal income tax means—
(1) Any United States person (as defined in section 7701(a)(30)), except for a domestic partnership, an S corporation (as defined in section 1361), a trust that is a United States person described in section 7701(a)(30)(E) and treated as owned by a person under sections 671 through 678, or a bona fide resident (as defined in section 937(a)) of Guam, the Commonwealth of the Northern Mariana Islands, or the U.S. Virgin Islands; and
(2) Any nonresident alien individual who elects to be treated as a resident of the United States under section 6013(g) or (h).
(e) Meaning of taxable income— (1) In general. Except as provided in paragraph (e)(2) of this section, for purposes of this section, taxable income means taxable income as defined in section 63.
(2) Exceptions— (i) Regulated investment companies. In the case of a regulated investment company (RIC) (as defined in section 851) that satisfies the requirements of section 852(a) for a taxable year in which the RIC receives, or is deemed to receive, a dividend described in paragraph (b)(1) of this section, taxable income means investment company taxable income (as defined in section 852(b)).
(ii) Real estate investment trusts. In the case of a real estate investment trust (REIT) (as defined in section 856) that satisfies the requirements of section 857(a) for a taxable year in which the REIT receives, or is deemed to receive, a dividend described in paragraph (b)(1) of this section, taxable income means real estate investment trust taxable income (as defined in section 857(b)(2)).
(iii) Exempt organizations. In the case of an organization exempt from taxation under section 501(a), taxable income means unrelated business taxable income (as defined in section 512).
(f) Determining whether a dividend increases taxable income —(1) In general. For purposes of determining whether a dividend paid or deemed paid increases the taxable income of a United States person subject to Federal income tax, all applicable provisions of the Internal Revenue Code, and the regulations thereunder, are applied before applying, and without regard to, the transition rule. Therefore, the determination of whether a dividend paid or deemed paid increases the taxable income of a United States person subject to Federal income tax is made after the application of any exclusion that results in the dividend not being included in the person's gross income or taxable income and any dividends received deduction that reduces the amount of the dividend included in the person's taxable income.
(2) Section 245A coordination example. The following example illustrates the application of the rule in paragraph (f)(1) of this section.
(i) Facts. US1, a domestic corporation that is not a RIC, REIT, S corporation, or organization exempt from taxation under section 501(a), owns all the stock of CFC, a foreign corporation. On March 1, 2025, CFC pays a dividend of $100x to US1, which, absent the application of § 1.245A-5(b), qualifies for the deduction under section 245A(a). On July 1, 2025, USP1 sells all its stock of CFC to US2, a domestic corporation, which results in an extraordinary reduction with respect to US1's ownership of CFC, within the meaning of § 1.245A-5(e)(1). If § 1.245A-5 were applied before and without regard to the transition rule, US1's pre-reduction pro rata share under § 1.245A-5(e)(2)(ii) would be $100x and the entire dividend of $100x to US1 would be an extraordinary reduction amount with respect to US1, within the meaning of § 1.245A-5(e)(1). Additionally, the ineligible amount with respect to US1 within the meaning of § 1.245A-5(b)(2), would be $100x. US1, US2, and CFC all use a calendar taxable year. US1's reporting for Federal income tax purposes is consistent with § 1.245A-5(e).
(ii) Analysis. Under paragraph (f)(1) of this section, the determination of whether the dividend of $100x increases the taxable income of US1, a United States person subject to Federal income tax, is made after the application of any exclusion that results in the dividend not being included in the person's gross income or taxable income and any dividends received deduction that reduces the amount of the dividend included in the person's taxable income. Additionally, in determining US1's pre-reduction pro rata share under § 1.245A-5(e)(2)(ii), any decrease for amounts taken into account by a U.S. tax resident under § 1.245A-5(e)(2)(ii)(B) is determined by applying section 951(a)(2)(B), as in effect before amendment by the OBBBA, without regard to the transition rule. Therefore, because the ineligible amount with respect to US1 and the dividend paid to US1 would be $100x before applying, and without regard to, the transition rule, the ineligible amount is $100x and none of the dividend paid to US1 is eligible for a section 245A deduction after applying § 1.245A-5(b). Accordingly, the entire dividend of $100x is treated as increasing the taxable income of a United States person subject to Federal income tax for purposes of this section. Additionally, the election to close CFC's taxable year pursuant to § 1.245A-5(e)(3)(i)(A) is available to US1, provided the other conditions described in § 1.245A-5(e)(3)(i)(A) are met.
(3) Generally applicable deductions. The determination of the amount by which a dividend paid or deemed paid increases the taxable income of a United States person subject to Federal income tax is made without regard to decreases to taxable income resulting from generally applicable deductions of the United States person that are not particular to the receipt of a dividend, including deductions for—
(i) Depreciation under section 167;
(ii) Net operating losses under section 172;
(iii) Distributions under sections 651 and 661; and
(iv) Dividends paid under sections 852(b)(2)(D) and 857(b)(2)(B).
(4) Dividends paid to controlled foreign corporations —(i) In general. In the case of a dividend paid or deemed paid by a controlled foreign corporation to another controlled foreign corporation, for purposes of this section, the dividend is treated as increasing the taxable income of a United States person subject to Federal income tax to the extent the dividend is taken into account in determining a United States shareholder's inclusion under section 951(a)(1)(A) or 951A(a).
(ii) Inclusions under section 951(a)(1)(A). For purposes of this paragraph (f)(4), a dividend is taken into account in determining a United States shareholder's inclusion under section 951(a)(1)(A) if the dividend would give rise to an amount includible in gross income by the United States shareholder under section 951(a)(1)(A), determined without regard to properly allocable deductions of the controlled foreign corporation that received or is deemed to receive the dividend (except as provided in paragraph (f)(4)(iv) of this section), the current earnings and profits limitation under section 952(c)(1)(A), qualified deficits under section 952(c)(1)(B), or chain deficits under section 952(c)(1)(A).
(iii) Inclusions under section 951A(a). For purposes of this paragraph (f)(4), a dividend is taken into account in determining a United States shareholder's inclusion under section 951A(a) if the dividend would give rise to an amount includible in gross income by the United States shareholder under section 951A, determined without regard to properly allocable deductions of the controlled foreign corporation that received or is deemed to receive the dividend (except as provided in paragraph (f)(4)(iv) of this section), tested losses (as defined in section 951A(c)(2)(B) before amendment by the OBBBA) of any other controlled foreign corporation, or the net deemed tangible income return of the United States shareholder (as defined in section 951A(b)(2) before amendment by the OBBBA).
(iv) High-taxed amounts. For purposes of this paragraph (f)(4), any dividend paid or deemed paid to a controlled foreign corporation that is excluded from the controlled foreign corporation's subpart F income or tested income under the high-tax exception or the high-tax exclusion (see section 954(b)(4) and § 1.951A-2(c)(1)(iii)), is treated as not taken into account in determining a United States shareholder's inclusion under section 951(a)(1)(A) or 951A(a).
(g) Application to partnerships —(1) In general. In the case of a dividend paid or deemed paid to a partnership, the determination of whether the dividend increases the taxable income of a United States person subject to Federal income tax is made by reference to the partners of the partnership. Further, to the extent the dividend is included in the distributive share of a partner that is itself a partnership, the determination of whether the dividend increases the taxable income of a United States person subject to Federal income tax is made by reference to the partners of that partnership.
(2) Safe harbor for publicly held partnership interests —(i) In general. To the extent a dividend paid or deemed paid by a controlled foreign corporation is allocated to a de minimis owner by reason of owning an interest in a class of publicly held interests in a domestic partnership, the dividend is treated as increasing the taxable income of a United States person subject to Federal income tax.
(ii) Exception. Paragraph (g)(2)(i) of this section does not apply if the domestic partnership has actual knowledge of facts that allow the partnership to determine that the de minimis owner is not a United States person subject to Federal income tax within the meaning of paragraph (d) of this section or that the dividend paid by the controlled foreign corporation does not increase the de minimis owner's taxable income within the meaning of paragraphs (e) and (f) of this section.
(iii) Meaning of de minimis owner. For purposes of this paragraph (g)(2), the term de minimis owner means any person that owns no more than 5 percent of a class of publicly held interests in a domestic partnership on each day of the taxable year of the domestic partnership. In determining whether a person is a de minimis owner, a person is treated as owning an interest in a class of publicly held interests if the person owns the interest directly or by applying the rules of section 318(a), except that section 318(a)(2)(C) and (a)(3)(C) are applied for this purpose by substituting “5 percent” for “50 percent.”
(iv) Meaning of publicly held interest. For purposes of this paragraph (g)(2), publicly held interest means any class of interests in a domestic partnership that is regularly traded on an established securities market as defined in § 1.7704-1(b), but without regard to § 1.7704-1(b)(3).
(h) Establishing extent to which a dividend increases taxable income of a United States person subject to Federal income tax. A United States shareholder that claims a reduction of its pro rata share of subpart F income or tested income under section 951(a)(2)(B), as a result of a dividend that is described in paragraph (b)(1) of this section, must substantiate such claim by attaching to Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations (or successors), a statement titled “Pro Rata Share Transition Rule Statement” that—
(1) Provides the amount of each dividend paid by the controlled foreign corporation (with respect to the stock owned by the United States shareholder filing the return) that is described in paragraph (b)(1) of this section but treated as a dividend for purposes of applying section 951(a)(2)(B),
(2) Describes why the United States shareholder filing the return is entitled to treat each such amount as a dividend for purposes of section 951(a)(2)(B), and
(3) Describes how the United States shareholder determined such amount increased the taxable income of a United States person subject to Federal income tax under the rules of this section.
(i) Applicability date. This section applies to taxable years of a foreign corporation that either include June 28, 2025, or begin after June 28, 2025, and before the foreign corporation's first taxable year beginning after December 31, 2025.