On May 23, 2019, the Internal Revenue Service (IRS) and the Treasury Department issued final regulations (the Final Section 956 Regulations) intended to mitigate the impact of Section 956 of the Internal Revenue Code (the Code) for certain domestic corporations. Consistent with the proposed regulations issued in November 2018 (see previous GT Alert here), the Final Section 956 Regulations align the application of the deemed income received under Section 956 with the participation exemption created under Section 245A of the Code, enacted by the 2017 Tax Cuts and Jobs Act (P.L. 115-97).
Prior to enactment of Section 245A, both actual and Section 956-deemed dividends that arose due to certain investments in U.S. property were included in the income of a domestic corporation and taxed symmetrically. The enactment of Section 245A provides for a participation exemption regime pursuant to which a 100 percent dividends-received deduction (DRD) is available to a corporate U.S. shareholder with respect to dividends received from the untaxed earnings of a “specified 10-percent owned foreign corporation” that are actually distributed to the shareholder. A specified 10-percent owned foreign corporation is any foreign corporation (other than certain passive foreign investment companies) with respect to which a domestic corporation owns at least 10 percent of voting power or value. Thus, a specified 10-percent owned foreign corporation includes a controlled foreign corporation (CFC) with respect to its corporate U.S. 10 percent shareholders. Contrary to the provisions of Section 245A, a Section 956 inclusion of a corporate U.S. shareholder of a CFC was not eligible for the DRD, thus creating unequal treatment between actual and deemed repatriations.
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