Start With Who Is Writing the Check | The 2026 Attribution Change for Private Funds

1. Introduction

This Insights article addresses who owes United States tax when a private fund acquires a foreign corporation, and what the governing documents should provide before the first closing.

A family office, a tax-exempt endowment, and a bank organized outside the United States do not owe the same tax on the same investment. For the inclusion under sections 951 and 951A, a domestic partnership is not treated as owning the foreign corporation’s stock. The inclusion runs to the partner who is a United States shareholder. See 26 U.S.C. §§ 951, 951A; Treas. Reg. § 1.958-1(d)(1).

For taxable years of foreign corporations beginning after December 31, 2025, Congress restored the limit on downward attribution. From 2018 through 2025, stock owned by a foreign person could be attributed down through a United States entity, and a foreign corporation could be a controlled foreign corporation although a United States partner did not control it. See 26 U.S.C. § 958(b)(4), as amended by Pub. L. No. 119-21, § 70353(a), 139 Stat. 209 (2025).

The partnership agreement, any blocker, and the purchase agreement should be written to that result before the first closing. If they are not, the mismatch is a tax controversy.

1. Who Is the United States Shareholder

A United States shareholder is a United States person who owns, or is considered as owning, 10 percent or more of the total combined voting power of a foreign corporation, or 10 percent or more of the total value of its shares. See 26 U.S.C. § 951(b).

A controlled foreign corporation is a foreign corporation if more than 50 percent of the voting power, or more than 50 percent of the value, is owned, or is considered as owned, by United States shareholders. See id. § 957(a). Ownership for these tests includes stock considered as owned under section 958. See id. § 958.

Whether a person is a United States shareholder, and whether the foreign corporation is a controlled foreign corporation, is determined with the domestic partnership treated as an owner. The inclusion is determined under a different rule. For sections 951 and 951A, the partnership is not treated as owning the stock within the meaning of section 958(a). See Treas. Reg. § 1.958-1(d)(1), (d)(2).

The regulations include this example. A domestic corporation and a United States citizen own 95 percent and 5 percent, respectively, of a domestic partnership. The partnership owns all of the stock of a foreign corporation. The partnership is a United States shareholder, and the foreign corporation is a controlled foreign corporation. The 95 percent partner is a United States shareholder. The 5 percent partner is not. The regulations then state:

However, because Individual A is not a United States shareholder of FC, Individual A does not have an income inclusion under section 951 with respect to FC or a pro rata share of any amount of FC for purposes of section 951A. This is the case even though PRS is a United States shareholder of FC.

Treas. Reg. § 1.958-1(d)(3)(i) (Example 1).

A distribution is not required before the inclusion arises.

III. The Attribution Amendment

Congress restored the limitation on downward attribution. Section 958(b)(4) provides:

Subparagraphs (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person.

26 U.S.C. § 958(b)(4).

The amendments apply to taxable years of foreign corporations beginning after December 31, 2025. See Pub. L. No. 119-21, § 70353(d), 139 Stat. 210 (2025). A foreign corporation on the calendar year is in that period for 2026.

The restoration does not reach every pattern. Section 951B can still require inclusion of Subpart F income and net CFC tested income. See 26 U.S.C. § 951B. Subpart F income is income of a controlled foreign corporation that a United States shareholder includes when earned, whether or not distributed.

A foreign controlled United States shareholder is a United States person who would be a United States shareholder if section 951(b) substituted more than 50 percent for 10 percent or more, and if section 958(b) were applied without regard to paragraph (4). A foreign controlled foreign corporation is a foreign corporation that is not a controlled foreign corporation, but that would be one if that counting were used. See id. § 951B(b), (c). Where both are present, that United States person can still have the inclusions. The effective date is the same.

Before the first closing, the ownership to test is a United States corporation in the chain, or a United States partner who would own more than 50 percent of the vote or value under the prior attribution.

1. Net CFC Tested Income

A United States shareholder of a controlled foreign corporation includes the shareholder’s net CFC tested income. See id. § 951A(a). That amount is the excess of the shareholder’s pro rata share of tested income over the shareholder’s pro rata share of tested loss. See id. § 951A(b).

The former statutory name was global intangible low-taxed income, commonly called GILTI. The 2025 legislation changed the name and struck the qualified business asset investment reduction. See Pub. L. No. 119-21, § 70323, 139 Stat. 205–206 (2025). The current definition does not allow a reduction for a return on tangible property. The inclusion can arise although the corporation distributes no cash to the United States.

A domestic corporation may deduct 40 percent of the net CFC tested income included under section 951A, and 40 percent of the related amount that section 78 treats as a dividend. See 26 U.S.C. § 250(a)(1)(B). An individual partner does not get the deduction. A partnership does not get the deduction. The 40 percent deduction applies to taxable years beginning after December 31, 2025. See Pub. L. No. 119-21, § 70321(b), 139 Stat. 204 (2025).

A domestic corporation placed between the partner and the investment may claim that deduction. An individual partner may not. That corporation is a blocker.

1. The Passive Foreign Investment Company

The attribution amendment can also change whether the foreign corporation is a passive foreign investment company. A foreign corporation is a passive foreign investment company if 75 percent or more of its gross income for the taxable year is passive income, or if the average percentage of its assets that produce passive income, or that are held for the production of passive income, is at least 50 percent. See 26 U.S.C. § 1297(a). Passive income is defined by reference to foreign personal holding company income, with stated exceptions. See id. § 1297(b).

During the portion of the holding period in which the shareholder is a United States shareholder and the corporation is a controlled foreign corporation, the corporation is not treated as a passive foreign investment company as to that shareholder. See id. § 1297(d). If the amendment takes the corporation out of that status as to the partner, the exception may no longer apply. A holding company that holds cash, or minority interests, may then be a passive foreign investment company as to that partner.

A qualified electing fund election must be made on or before the due date of the return, including extensions. The company must comply with the requirements the Secretary prescribes for determining ordinary earnings and net capital gain. Once made, the election applies to later years unless revoked with the consent of the Secretary. See id. § 1295. A mark to market election is available only for marketable stock, including stock regularly traded on a national securities exchange registered with the Securities and Exchange Commission. See id. § 1296. Shares of a private portfolio company are ordinarily not marketable stock.

1. The Limited Partner

A tax-exempt organization is taxed on unrelated business taxable income. See id. § 511. Dividends, interest, and capital gain are usually an exception to the unrelated business taxable income rules. See id. § 512(b)(1), (b)(5). If the organization borrowed to buy the property, a computed portion of the income is included. See id. §§ 512(b)(4), 514. If the organization has more than one unrelated trade or business, the tax is computed separately for each. A loss in one does not reduce the income of another. See id. § 512(a)(6).

If the partnership has effectively connected taxable income allocable to a foreign partner, the partnership pays a withholding tax on that share. The rate is the highest rate under section 1 if the foreign partner is not a corporation, and the highest rate under section 11(b) if the foreign partner is a corporation. See id. § 1446(a), (b).

A blocker can keep unrelated business taxable income, and effectively connected taxable income, from passing through to the limited partner. It can also place a corporate tax on the investment. Whether a blocker is warranted depends on the limited partners actually admitted, and on whether those investments are expected to produce the items. The form of entity should not be chosen in the abstract.

A profits interest, commonly called carried interest, is subject to section 1061. The excess of net long-term capital gain over the gain computed by substituting three years for one year is treated as short-term capital gain. See id. § 1061(a). A holding period of two years is not long-term under that rule. The rule applies to taxable years beginning after December 31, 2017. See Pub. L. No. 115-97, § 13309(c), 131 Stat. 2131 (2017).

VII. The Fund and the Adviser

The fund must also come within an exemption from the Investment Company Act of 1940, or it may be required to register with the Securities and Exchange Commission. Section 3(c)(1) applies if the outstanding securities, other than short-term paper, are beneficially owned by not more than 100 persons, or 250 persons in the case of a qualifying venture capital fund, and the issuer is not making and does not presently propose to make a public offering. See 15 U.S.C. § 80a-3(c)(1). Section 3(c)(7) applies if the outstanding securities are owned exclusively by qualified purchasers, and the issuer is not making and does not propose to make a public offering. See id. § 80a-3(c)(7).

A qualified purchaser includes a natural person who owns not less than $5,000,000 in investments, and a person who owns and invests on a discretionary basis not less than $25,000,000 in investments for that person’s own account or for other qualified purchasers. See id. § 80a-2(a)(51).

The adviser is governed by the Investment Advisers Act of 1940. Section 203(m) requires an exemption from registration if the adviser acts solely as an adviser to private funds and has assets under management in the United States of less than $150,000,000. The same subsection directs the Commission to require records and reports from an adviser so exempted. The exemption is not available at $150,000,000 or more. See id. § 80b-3(m).

On August 23, 2023, the Commission adopted additional rules for advisers to private funds. On June 5, 2024, the Fifth Circuit held that the Commission exceeded its statutory authority and vacated those rules. Nat’l Ass’n of Private Fund Managers v. SEC, No. 23-60471, slip op. at 25 (5th Cir. June 5, 2024). The mandate issued on July 29, 2024. The Fifth Circuit docket does not show a rehearing or a petition for certiorari.

A fee, management agreement, or license between the sponsor, the fund, and a foreign corporation the fund owns is a controlled transaction if the same persons sit on both sides. Section 482 permits the Secretary to allocate income among them if necessary to prevent evasion of taxes or clearly to reflect the income. See 26 U.S.C. § 482. The standard is that of a taxpayer dealing at arm’s length with an uncontrolled taxpayer. See Treas. Reg. § 1.482-1(b)(1).

VIII. Summation

Before the first closing, the questions are these.

1. Who is writing the check, and does that person own 10 percent or more?
2. After the attribution amendment, is the foreign corporation a controlled foreign corporation as to that person, or does section 951B still apply?
3. Do the limited partners actually admitted require a blocker?
4. Do the partnership agreement, the blocker, and the purchase agreement produce the same result?

Ideally, the partnership agreement, the blocker, and the purchase agreement will be structured to achieve the same result. That is tax advising, which is outside general counsel’s work. Freeman Law’s practice is built to take on these tasks.

If the documents have already been signed to a different result, what remains is a controversy: who had the inclusion, whether the withholding tax was paid, whether unrelated business taxable income was reported, and whether a related fee or license was priced as a transaction between uncontrolled taxpayers.