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Proposed regulations, Rev Proc. 2019-40: Relief provided concerning repeal of section 958(b)(4) (text of regulations)

Relief provided concerning repeal of section 958(b)(4)

The U.S. Treasury Department and IRS today released for publication in the Federal Register proposed regulations (REG-104223-18) under section 958(b)(4) as amended by the U.S. tax law enacted in 2017 (the law that is often referred to as the “Tax Cuts and Jobs Act” (Pub. L. No. 115-97)).


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The proposed regulations [PDF 351 KB] (13 pages as published in the Federal Register) relate to U.S. persons that have ownership interests in or that make or receive payments to or from certain foreign corporations. 

The proposed regulations are intended to provide additional relief to taxpayers affected by the repeal of section 958(b)(4), and propose modifications to existing regulations that are intended to provide in certain instances that the operation of certain rules is consistent with their application before the repeal of section 958(b)(4). 

The IRS also released an advance version of Rev. Proc. 2019-40 [PDF 108 KB] to limit the inquiries required by U.S. persons to determine whether certain foreign corporations are controlled foreign corporations (CFCs).

A related IRS release—IR-2019-162—explains that the revenue procedure also:

  • Allows certain unrelated minority U.S. shareholders to rely on specified financial statement information to calculate their subpart F and GILTI inclusions and satisfy reporting requirements with respect to certain CFCs if more detailed tax information is not available
  • Provides penalty relief to taxpayers in the specified circumstances. 
  • States the IRS intends to amend the instructions for Form 5471 to reduce the amount of information that certain unrelated minority U.S. shareholders of the CFC are required to provide
  • Will limit the filing requirements of U.S. shareholders that only constructively own stock of the CFC solely due to downward attribution from another person

The purpose of this report is to provide text of the proposed regulations. A report from KPMG will follow up with a more detailed discussion.


The 2017 tax law removed section 958(b)(4) for the last tax year of foreign corporations beginning before January 1, 2018, and all subsequent tax years and for the tax years of a U.S. shareholder with or within which such tax years end. Thus, “downward attribution” of stock ownership from foreign persons is taken into account for purposes of determining whether a U.S. person is a U.S. shareholder of a foreign corporation for purposes of the new law’s transition rule.

The 2017 tax law also eliminated a constructive ownership rule in section 958(b)(4) that prevents downward attribution of stock owned by a foreign person to a U.S. person. As a result, for example, stock owned by a foreign corporation is to be treated as constructively owned by its wholly owned domestic subsidiary for purposes of determining the U.S. shareholder status of the subsidiary and the CFC status of the foreign corporation. 

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