Final Regulations Address Treatment of Domestic Partnerships for Subpart F Issues

calendar iconFebruary 2, 2022

The IRS and Treasury Department recently released final regulations related to the determination of the income inclusions under section 951 (“Subpart F”) that substantially overhaul longstanding Subpart F regulations involving domestic partnership that own stock in a controlled foreign corporation.  The final regulations (“2022 Subpart F Regulations”) treat a domestic partnership as an aggregate of its partners for purposes of determining income inclusion under section 951 and for purposes of other provisions that reference 951.  These changes are consistent with the regulations issued under section 951A that apply an aggregate approach for GILTI purposes.

The 2022 Subpart F Regulations were published in the Federal Register on January 25, 2022 (T.D. 9960), and apply to taxable years of foreign corporations beginning or after the January 25, 2022, and to taxable years of U.S. persons in which or with which such taxable years of the foreign corporation ends. Domestic partnership can elect to apply these Regulations for years that began after December 31, 2017.

The 2022 Subpart F Regulations finalize Subpart F-related provisions of the proposed regulations issued in 2019 with respect to the following:

  • Clarification that the aggregate approach applies for purposes of section 956(a) but not for sections 956(c) or (d).
  • Aggregate treatment does not apply for purposes of determining the controlling domestic shareholders of a CFC under Treas. Reg. 1.964-1(c)(5).
  • Aggregate treatment does not apply for section 1248 purposes.
  • Aggregate treatment does not apply to domestic non-grantor trusts and domestic estates.
  • Aggregate treatment for purposes of determining whether any U.S. person is a U.S. Shareholder under section 951(b) or the definition of whether a foreign corporation is a controlled foreign corporation under section 957(a).

The 2022 Subpart F Regulations did not address the following:

  • Transition rules for previously taxed earnings and profits accounts under section 959 and related basis adjustments under section 961 that were maintained or made at the partnership level.
  • Application of the aggregate approach for PFIC purposes. Note, proposed regulations have been issued to address these issues (REG-118250-20).

For questions about these rules and other international tax matters, contact your Cherry Bekaert advisory or a member of the Cherry Bekaert International Tax team.