Business Planning & Transactions

International Tax Rules Are Changing: What to Know Now

On July 4, 2025, President Trump signed the One Big Beautiful Bill Act (OBBBA) into law, bringing major changes to how U.S. taxpayers with foreign business interests are classified and taxed. Among its many provisions, the OBBBA reinstates Internal Revenue Code §958(b)(4), which limits downward attribution of stock ownership, and introduces new §951B, creating a framework for foreign-controlled structures that use U.S. entities as intermediaries. These changes eliminate “phantom” controlled foreign corporations for many taxpayers, offering meaningful compliance relief while also imposing new obligations for certain multinational structures.

Below, we outline what’s changing, who benefits, who faces new requirements, and why now is the time to review your international structure and reporting approach.

Background Information

  • A controlled foreign corporation (CFC) is generally defined as any foreign corporation in which U.S. shareholders own more than 50% of the total combined voting power or value.[1] A U.S. shareholder is a U.S. person who owns at least 10% of the voting power of the foreign corporation.[2] When a foreign corporation qualifies as a CFC, its U.S. shareholders must include certain income in their gross income annually, regardless of whether the CFC distributes any earnings. This anti-deferral regime applies to Subpart F income and, as renamed by the OBBBA, Net CFC Tested Income (formerly known as GILTI).[3]
  • In determining whether a U.S. person is a U.S. shareholder and whether a foreign corporation is a CFC, the Internal Revenue Code applies constructive ownership rules. These rules can attribute stock owned by one person to another person based on family relationships, partnerships, estates, trusts, and corporations.[4] Prior to 2018, §958(b)(4) prevented “downward attribution” from a foreign person to a U.S. person. This meant that stock owned by a foreign parent corporation could not be attributed downward to its U.S. subsidiary when determining CFC status.
  • The Tax Cuts and Jobs Act of 2017 (TCJA) repealed §958(b)(4), effective for tax years of foreign corporations beginning after December 31, 2017.[5] This repeal allowed downward attribution from foreign persons to U.S. persons, which dramatically expanded the number of foreign corporations treated as CFCs. In a common scenario, if a foreign parent wholly owned both a U.S. subsidiary and a foreign subsidiary (a brother-sister structure), the foreign parent’s ownership of the foreign subsidiary could be attributed down to the U.S. subsidiary. This made the foreign subsidiary a CFC even though the U.S. subsidiary had no direct ownership in it. These entities became known as “faux CFCs” because they were CFCs solely by reason of the downward attribution rules, not because of genuine U.S. control.
  • The repeal of §958(b)(4) created substantial and often unintended compliance burdens for U.S. taxpayers. Many U.S. subsidiaries of foreign-parented multinational groups suddenly had information reporting obligations and potential income inclusions from foreign sister corporations over which they exercised no actual control. This was particularly problematic for passive U.S. investors and members of foreign-controlled multinational groups.

OBBBA Changes

  • Reinstatement of §958(b)(4)
    • The OBBBA reinstates §958(b)(4), reversing the TCJA’s repeal and once again prohibiting downward attribution from foreign persons to U.S. persons for purposes of determining CFC status.[6] This change returns the law to its pre-TCJA framework and will eliminate CFC classification for many foreign corporations that became faux CFCs after 2017. For example, in the brother-sister structure described above, the foreign subsidiary will no longer be considered a CFC solely because of downward attribution from the foreign parent to the U.S. subsidiary.
    • The reinstatement of §958(b)(4) is effective for tax years of foreign corporations beginning after December 31, 2025, and for tax years of U.S. shareholders in which or with which such foreign corporation tax years end.[7] This means that for foreign corporations operating on a calendar year basis, the change takes effect January 1, 2026. For foreign corporations with non-calendar fiscal years, however, the change will not take effect until the first tax year beginning after December 31, 2025. For instance, a foreign corporation with a June 30 fiscal year-end would continue to be treated as a CFC (if applicable under current law) through June 30, 2026, with the new rules applying beginning July 1, 2026.
  • Introduction of §951B: Foreign-Controlled U.S. Shareholders and Foreign-Controlled Foreign Corporations
    • While reinstating §958(b)(4) provides broad relief, Congress recognized that the original policy concerns motivating the TCJA’s repeal still needed to be addressed. Specifically, the TCJA’s repeal was intended to prevent foreign-parented multinational groups from using U.S. intermediary entities to avoid CFC classification and thereby escape U.S. tax on certain income. To address this concern in a more targeted manner, the OBBBA introduces new §951B, which creates a parallel anti-deferral regime applicable to foreign-controlled groups.[8]
    • Section 951B introduces two new terms: foreign-controlled U.S. shareholders (FCUS) and foreign-controlled foreign corporations (FCFC). A foreign-controlled U.S. shareholder is defined as a U.S. person who would be a U.S. shareholder of a foreign corporation if two modifications were made to the traditional definition. First, the ownership threshold is increased from 10% to more than 50% by vote or value. Second, the constructive ownership rules are applied without regard to §958(b)(4), meaning downward attribution from foreign persons is permitted for purposes of determining FCUS status.[9]
    • A foreign-controlled foreign corporation is defined as a foreign corporation, other than a CFC under the traditional rules, that would be a CFC if the term “foreign controlled United States shareholders” were substituted for “United States shareholders” in §957(a) and if downward attribution were permitted (i.e., §958(b)(4) were disregarded).[10] In simpler terms, an FCFC is a foreign corporation that is not a CFC under the reinstated rules but is controlled by foreign persons through a structure that includes a U.S. intermediary with sufficient ownership.
    • Under §951B, a foreign-controlled U.S. shareholder must include in gross income its pro rata share of Subpart F income and Net CFC Tested Income from any FCFC, applying rules similar to those applicable to traditional CFC inclusions.[11] However, income inclusions under §951B only apply to the extent the FCUS owns stock in the FCFC directly or indirectly under §958(a), not merely through constructive ownership under §958(b).[12] This ensures that actual economic ownership, not just constructive ownership, triggers the income inclusion.
    • Section 951B also grants Treasury broad regulatory authority to treat FCFCs as CFCs and FCUS as U.S. shareholders for other purposes of the Internal Revenue Code, including information reporting requirements and coordination with the passive foreign investment company (PFIC) rules.[13] This authority will be critical in addressing technical issues and ensuring that the new regime functions as intended.

Practical Implications

  • Who Benefits from the Changes
    • The reinstatement of §958(b)(4) will provide substantial relief to U.S. taxpayers who became subject to CFC reporting and inclusion requirements solely as a result of downward attribution under post-TCJA rules. This includes U.S. subsidiaries of foreign-parented multinational groups, U.S. investors in foreign private equity funds with complex structures, and U.S. persons with minority interests in foreign corporations controlled by foreign persons. These taxpayers will see reduced Form 5471 filing obligations and elimination of income inclusions from faux CFCs, thereby significantly decreasing compliance burdens and potential tax liabilities.
  • Who Faces New Compliance Obligations
    • Conversely, U.S. persons who fall within the §951B framework as foreign-controlled U.S. shareholders will face new compliance and income inclusion obligations with respect to FCFCs. This primarily affects U.S. entities that are part of foreign-controlled multinational groups and have meaningful ownership (more than 50% when applying downward attribution) in foreign sister corporations or other foreign entities within the group. These taxpayers must determine whether they are FCUS, identify any FCFCs in their corporate structure, and comply with Subpart F and Net CFC Tested Income inclusion rules as well as Form 5471 reporting requirements.
  • Transition Issues and Fiscal Year Considerations
    • The effective date provisions create a transition period for foreign corporations with non-calendar fiscal years. During this transition period, taxpayers must continue to apply current law, including the broader CFC definitions resulting from downward attribution, until the foreign corporation’s first tax year beginning after December 31, 2025. This means some taxpayers will experience a split year, with different rules applying before and after the transition date. Proper planning and coordination will be necessary to ensure accurate income inclusions and reporting during this period.
  • PFIC Considerations
    • An important consequence of the §958(b)(4) reinstatement is that some foreign corporations will lose their CFC status entirely. When a foreign corporation is no longer a CFC, it may become subject to the PFIC rules if it meets the income or asset tests under §1297. The PFIC regime generally imposes less favorable tax treatment than the CFC regime, including potential interest charges on deferred tax and lack of access to certain benefits available to CFC shareholders. Taxpayers should evaluate whether foreign corporations losing CFC status will become PFICs and consider available elections, such as the qualified electing fund election or mark-to-market election, to mitigate adverse PFIC consequences.

Key Takeaways

  • The reinstatement of §958(b)(4) and the introduction of §951B represent significant developments in the CFC rules that will affect many U.S. taxpayers with international operations or investments. While the changes provide welcome relief from the compliance burdens created by the TCJA’s repeal of §958(b)(4), they also introduce new complexities through the §951B anti-abuse regime.
  • Taxpayers should work closely with their tax advisors to understand how these changes affect their specific situations and to implement appropriate planning strategies before the effective date.
  • Our attorneys are available to assist with analyzing the impact of these changes on your international tax position and developing strategies to optimize your tax outcomes under the new rules.

Contact Us

For more information, please contact the Davis, Agnor, Rapaport & Skalny attorney with whom you typically work, or reach out to a member of our Business Planning & Transactions Practice Group.

 

Sources

[1] Internal Revenue Code §957(a).

[2] Internal Revenue Code §951(b).

[3] The OBBBA renamed “global intangible low-taxed income” (GILTI) to “Net CFC Tested Income” (NCTI). Pub. L. 119-21, §70323.

[4] Internal Revenue Code §§958(b) and 318(a).

[5] Pub. L. 115-97, §14213(a) (Tax Cuts and Jobs Act), Dec. 22, 2017.

[6] Pub. L. 119-21, §70353(a).

[7] Id.

[8] Pub. L. 119-21, §70353(b) (adding new Internal Revenue Code §951B).

[9] Internal Revenue Code §951B(b).

[10] Internal Revenue Code §951B(c).

[11] Internal Revenue Code §951B(a).

[12] Internal Revenue Code §951B(a)(2)(A).

[13] Internal Revenue Code §951B(d).