On 1 August 2018, the US Treasury Department and the US Internal Revenue Service (IRS) issued proposed regulations (REG-104226-18) to provide guidance on the transition tax under section 965 of the US Internal Revenue Code (IRC).
The transition tax is imposed on untaxed foreign earnings of foreign subsidiaries of US companies under IRC section 965, which treats those earnings as if they had been repatriated to the United States.
Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5% rate. The remaining earnings are taxed at an 8% rate.
The lower effective tax rates applicable to section 965 income inclusions are achieved by way of a participation deduction set out in IRC section 965(c). A reduced foreign tax credit (FTC) also applies with respect to the inclusion under IRC section 965(g). Taxpayers may generally elect to pay the transition tax in installments over an 8-year period under IRC section 965(h).
The proposed regulations contain information on the calculation and reporting of the section 965(a) inclusion amount, as well as information for making the elections available to taxpayers under IRC section 965.