On Jan. 25, the U.S. Department of the Treasury and the IRS published final regulations under IRC Section 958 regarding the treatment of Subpart F income with respect to domestic pass-through entities (2022 final regulations). In addition, they issued proposed regulations with respect to the treatment of passive foreign investment corporations (PFICs) owned by pass-through entities (2022 proposed PFIC regulations). Following are five things to know about the 2022 final regulations and the 2022 proposed PFIC regulations.
1. The 2022 final regulations now require aggregate treatment for Subpart F and 956 inclusions.
Under U.S. tax law, a pass-through entity is treated either as an entity that is separate from its owners or as an aggregate of its owners, depending on the operative codes section being applied. When entity treatment applies for partnerships, the tax impact of items that flow into the partnership is determined at the partnership level and then allocated to the partners. When aggregate treatment applies, partners take into account pro rata shares of the components of an affected tax item rather than a distributive share of the item. Final regulations published in 2019 (2019 final regulations) treat domestic partnerships and pass-through entities as aggregates of their owners for purposes of the global intangible low-taxed income (GILTI) inclusion. In addition, proposed regulations issued in 2019 (2019 proposed regulations) applied aggregate treatment to Subpart F, which was a substantial change from entity treatment that was required under the rules at the time.
The 2022 final regulations closely follow the 2019 proposed regulations and provide for aggregate treatment for GILTI, Subpart F, and Section 956 inclusions. Although the 2022 final regulations do not address PFICs, related-person insurance income, previously taxed earnings, or basis issues, the preamble states that these issues will be addressed in future guidance.