Code Sec. 951(a)(1)(B) requires a US shareholder of a controlled foreign corporation (CFC) to include in its gross income “the amount determined under section 956 with respect to such shareholder for such year….” This amount generally is the shareholder’s pro rata share of the average of the amounts of US property held by the CFC as of the close of each quarter. The amount of the inclusion is reduced by the amount of the CFC’s previously taxed income, and limited by its earnings and profits.

Proposed Code Sec. 956 regulations generally would eliminate this Subpart F inclusion rule for corporate US shareholders, although not in all cases. In those cases where a CFC’s earnings are subject to taxation under Code Sec. 951(a)(1)(B), proposed foreign tax credit regulations would deny deemed paid foreign tax credits for foreign income taxes paid on the CFC’s earnings that are subject to taxation.

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Originally published in International Tax Journal, January-February 2019.