Proposed CFC Pro Rata Share Rules

The U.S. Department of the Treasury and the IRS have published proposed regulations under Sections 951 and 951A implementing the OBBBA changes to how U.S. shareholders determine their pro rata share of subpart F income, tested income, and tested loss with respect to a CFC. The proposed regulations provide the OBBBA’s ownership-period framework, which replaces the former last-relevant-day approach, introduce mandatory and elective taxable year closings, and provide related transition and reporting rules. Comments and hearing requests are due by Oct. 26.

Background

Before the OBBBA, Section 951(a)(1)(A) generally required a subpart F inclusion only for a U.S. shareholder that owned CFC stock on the last relevant day of the CFC's tax year. A hypothetical distribution determined the shareholder’s pro rata share, subject to a reduction under former Section 951(a)(2)(B) for certain dividends paid to another person. Section 951A generally used the same pro rata share approach for tested income and tested loss.

The OBBBA amended Sections 951 and 951A to revise the old framework for the inclusion of subpart F income, tested income, or tested loss for foreign corporation tax years beginning after Dec. 31, 2025. A U.S. shareholder now can have a Section 951(a)(1)(A) inclusion if it owns stock on any day during the tax year. Section 951(a)(2) attributes the annual amount of the inclusion to periods when the shareholder owned the stock, was a U.S. shareholder, and the foreign corporation was a CFC. The statute also changed Section 951A to a net CFC tested income model. Notice 2025-75 provides interim guidance on the statutory transition rule.

Highlights of proposed regulations

If a CFC has no change in stock ownership during its taxable year, a U.S. shareholder’s pro rata share generally would be the same as under existing rules. When ownership changes, the proposed regulations generally would use daily proration as the default method to allocate a CFC’s annual subpart F income, tested income, or tested loss during the CFC’s year. For a CFC with one class of stock and a constant share count, a U.S. shareholder’s pro rata share generally would equal the relevant annual amount multiplied by the shareholder’s percentage ownership and the fraction of the year represented by its qualifying ownership days. The seller is treated as owning the stock through the disposition date, and the buyer’s ownership begins the next day. For multiple classes, a hypothetical distribution first allocates the annual amount among classes, followed by daily proration within each class.

Crowe observation

The default daily proration approach can allocate post-sale results to a seller and pre-acquisition results to a buyer.

The proposed regulations address when a foreign corporation’s taxable year must or can close. A mandatory closing applies when a foreign corporation becomes or ceases to be a CFC, and that closing applies for all IRC purposes and all shareholders.

The regulations also allow an elective closing when specified transfers under the same plan cause aggregate Section 958(a) U.S. shareholder ownership to decrease by more than 50 percentage points as compared to the ownership percentage immediately before the first specified transfer. Increases in ownership by related U.S. persons generally offset decreases, and Section 368(a)(1)(F) reorganizations are excluded. To make the election, each controlling Section 958(a) U.S. shareholder must file an election statement with a timely filed original return (including extensions), and all relevant pre-closing Section 958(a) U.S. shareholders generally must enter into a written, binding agreement to make the election. A plan involving multiple CFCs must apply the election consistently to all affected CFCs.

The closing rules affect foreign tax timing. Later-accruing, nonwithholding foreign income taxes are allocated to the preclosing period based on the foreign taxable income attributable to that period under a closing-of-the-books approach. However, a partnership owned by the foreign corporation generally would not close its year solely because the CFC’s year closes. The CFC’s entire distributive share for a partnership year spanning the closing date generally would fall into the CFC’s following short year.

Crowe observation

Purchase agreements should address tax allocations and post-closing information access if the parties rely on the proposed regulations or if those proposed rules ultimately are finalized.

The proposed regulations largely incorporate the Section 951 transition rules set forth in Notice 2025-75. Like the notice, the proposed regulations provide that a dividend within the transition window is disregarded for purposes of the former Section 951(a)(2)(B) reduction rule to the extent it does not increase the taxable income of a U.S. person subject to federal income tax. Additionally, a U.S. shareholder claiming a reduction must substantiate the extent to which the dividend increased taxable income and attach a required statement to Form 5471.

Separately, the proposed regulations would expand Form 5471 reporting by requiring class-by-class stock information and dated records of issuances, redemptions, acquisitions, dispositions, and ownership balances. Also, the extraordinary reduction rules in Treasury Regulation Section 1.245A-5(e) and (f) would not apply to foreign corporation taxable years beginning after Dec. 31, 2025.

Crowe observation

Expanded Form 5471 stock reporting could affect compliance practices immediately for groups preparing for 2026 transactions.

The regulations generally are proposed to apply to tax years of foreign corporations beginning after Dec. 31, 2025, and to relevant U.S. shareholder taxable years. The transition rule for certain pre-acquisition dividends under former Section 951(a)(2)(B) would apply to taxable years of a foreign corporation that include June 28, 2025, or begin after that date before the foreign corporation’s first taxable year beginning after Dec. 31, 2025. When a CFC’s year begins after Dec. 31, 2025, but ends within a U.S. shareholder’s year that began on or before that date, the shareholder would calculate a global intangible low-taxed income inclusion under former Section 951A while applying the new ownership-period rules to its pro rata shares of tested items. Taxpayers can rely on all aspects of the proposed regulations before finalization only if they and their related parties apply the rules in their entirety and consistently.

Looking ahead

Taxpayers should consult their tax advisers to assess how the proposed rules could affect current structures, planned CFC transactions, and reporting obligations. Treasury and the IRS expect to finalize the regulations by Jan. 4, 2027. The preamble also notes that additional projects are expected to align Section 951A, Section 1248, and previously taxed earnings and profits guidance with the amendments made in the OBBBA.