On 1 October 2019, the US Treasury Department and the US Internal Revenue Service (IRS) issued Revenue Procedure 2019-40 to provide relief to certain US persons that own stock in certain foreign corporations in connection with the repeal of section 958(b)(4) of the US Internal Revenue Code (IRC). The IRS issued a related News Release (IR-2019-162) dated 1 October 2019.
IRC section 318(a)(3) generally attributes stock owned by a person to a partnership, estate, trust, or corporation in which the person has an interest (so-called "downward attribution").
Before the repeal by the Tax Cuts and Jobs Act (TCJA), former IRC section 958(b)(4) provided that downward attribution should not apply so as to consider a US person as owning stock owned by a person who is not a US person (a "foreign person").
As a result of the repeal of IRC section 958(b)(4), stock of a foreign corporation owned by a foreign person can be attributed to a US person under IRC section 318(a)(3) for purposes of determining whether a US person is a US shareholder of the foreign corporation and, therefore, whether the foreign corporation is a controlled foreign corporation (CFC). Accordingly, US persons that were not previously treated as US shareholders may be treated as US shareholders, and foreign corporations that were not previously treated as CFCs may be treated as CFCs.
Revenue Procedure 2019-40 provides guidance on determining whether certain foreign corporations are CFCs. Revenue Procedure 2019-40 also allows certain unrelated minority US shareholders to rely on specified financial statement information to calculate their subpart F and global intangible low-taxed income (GILTI) inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available. Revenue Procedure 2019-40 also provides penalty relief to taxpayers in the specified circumstances.
In addition, Revenue Procedure 2019-40 announces that the IRS intends to amend the instructions for IRS Form 5471 (Information Return of US Persons With Respect To Certain Foreign Corporations) to reduce the amount of information that certain unrelated minority US shareholders of the CFC are required to provide, and to limit the filing requirements of US shareholders who only constructively own stock of the CFC solely due to downward attribution from another person.
Revenue Procedure 2019-40 generally applies from the last taxable year of a foreign corporation beginning before 1 January 2018 and to the taxable years of US shareholders in which or with which such taxable years of such foreign corporation end.
Revenue Procedure 2019-40 will be in the IRS Internal Revenue Bulletin (IRB) as part of IRB 2019-43 dated 21 October 2019.