Subpart F Gets New Proposed Regulations Implementing OBBBA

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TL Fahring

TL Fahring

Attorney

512.672.8920
tfahring@freemanlaw.com

TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

Subpart F Gets New Proposed Regulations Implementing OBBBA

On August 26, 2026, the Internal Revenue Service issued proposed regulations to implement changes to subpart F of the Internal Revenue Code (the “Code”) made by the One Big Beautiful Bill Act of 2025 (“OBBBA”).

Pre-OBBBA Subpart F

Prior to the OBBBA, former section 951(a)(1)(A) of the Code generally required a United States shareholder of a foreign corporation to include in gross income the shareholder’s pro rata share of the corporation’s subpart F income for the corporation’s taxable year if the corporation was a controlled foreign corporation (“CFC”) at any time during that taxable year and the shareholder owned stock in the CFC on the last day of that taxable year. (See here for basic info on the terminology used in subpart F.)

The United States shareholder’s pro rata share of the CFC’s subpart F income was calculated by first determining the amount subpart F income allocable to the CFC’s stock that the United States shareholder owned on the last day of the taxable year. This amount was then limited based on the portion of the taxable year during which the foreign corporation was a CFC and further reduced by certain distributions made by the CFC in order to arrive at the U.S. shareholder’s pro rata share of the CFC’s subpart F income.

After the Tax Cuts and Jobs Act of 2017, section 951A(a) of the Code also required a United States shareholder of a CFC to include in gross income the United States shareholder’s global intangible low-taxed income (“GILTI”). A United States shareholder’s GILTI inclusion was determined by the shareholder’s pro rata share of tested items—such as tested income, tested loss, and qualified business asset investment— of all CFCs in which the shareholder owned stock, with this pro rata share generally being determined in the same manner as a United States shareholder’s pro rata share of a CFC’s subpart F income. More specifically, “GILTI” was defined as the excess of a United States shareholder’s net CFC tested income during the taxable year over the shareholder’s net deemed tangible income return for the taxable year, with “net deemed tangible income return” generally meaning the excess of 10% of the aggregate of the United States shareholder’s qualified business assets of each CFC with respect to the United Staes shareholder for the taxable year.

Changes the OBBBA Made to Subpart F

The OBBBA amended section 951(a)(1)(A) so that a subpart F inclusion applies to any United States shareholder that holds stock at any time of the taxable year in a foreign corporation that was a CFC at any time in the taxable year (in other words, now the inclusion is not limited to United States shareholders who own stock in the CFC at the end of the taxable year). The subpart F inclusion with respect to a CFC year is included in the gross income of the United States shareholder’s taxable year which includes the last day on which the shareholder owns stock in the CFC during the CFC year.[1]

The OBBBA also amended section 951A(a) to require each United States shareholder of a CFC for any taxable year of the United Statse shareholder to include in gross income the United States shareholder’s net CFC tested income for the taxable year (the term “net CFC tested income” being substituted for the arguably more pejorative “GILTI”). Section 951A(b)(1) provides that net CFC tested income means, with respect to any United States shareholder for any taxable year of the United States shareholder, the excess (if any) of (i) the aggregate of the United States shareholder’s pro rata share of the tested income of each CFC with respect to which the shareholder is a United States shareholder for the United States shareholder’s taxable year, over (ii) the aggregate of the United States shareholder’s pro rata share of the tested loss of each CFC with respect to which the shareholder is a United States shareholder for the United States shareholder’s taxable year. Thus, the OBBBA eliminated the requirement that an inclusion under section 951A applies only if the United States shareholder’s net CFC tested income exceeds their net deemed tangible return.

Proposed Regulations Implementing the OBBBA

What the OBBBA left up in the air (and what the proposed regulations seek to answer) is exactly how United States shareholders are now supposed to calculate their subpart F inclusion.

Under the proposed regulations, each United States shareholder of a foreign corporation that owns stock in the corporation on any day during a CFC year would include the shareholder’s pro rata share of the corporation’s subpart F income for the CFC year in the shareholder’s gross income for the taxable year that includes the last day on which the shareholder owned stock in the corporation during the CFC year.[2]

The proposed regulations define a “CFC year” as a taxable year of a foreign corporation in which the corporation is a CFC at any time.[3] If a foreign corporation becomes or ceases to be a CFC, the corporation’s taxable year would close for all federal tax purposes.[4]

A United States shareholder’s pro rata share of a CFC’s subpart F income for a CFC year would be the portion of the subpart F income attributable to the corporation’s stock that the United States shareholder owns during the period of the CFC year in which:

If there’s only one class of stock of the foreign corporation and no change in ownership during the CFC year, then the United States shareholder’s pro rata share of subpart F income would be the corporation’s total subpart F income multiplied by the product of:

If the United States shareholder owns  shares of stock in the CFC for differing periods of time during the CFC year, this formula would be applied separately to each tranche with the same holding period.[7] This formula also would be applied separately to each class of stock held by the United States shareholder in the CFC during the CFC year after first allocating the CFC’s subpart F income for the CFC year among the classes of stock based on their relative distribution rights.[8] If the foreign corporation’s number of outstanding shares were to change during the CFC year, then a weighted average would be used to calculate the United States shareholder’s pro rata share—this weighted average would be the sum of outstanding shares on each day of the CFC year divided by the number of days in the CFC year.[9]

The proposed regulations also would revise the regulations under section 951A to coordinate the determination of a United States shareholder’s pro rata share of a CFC’s tested income or tested loss with the rules for the determination of a United States shareholder’s subpart F inclusion, including the determination of a foreign corporation’s CFC year.[10] The proposed regulations would provide that, under section 951A as revised by the OBBBA, a United States shareholder is required to include in gross income its net CFC tested income inclusion amount, prescribe rules for determining this amount, and remove the rules for determining a United States shareholder’s pro rata share of qualified business asset investment.

[1] Id. § 951(a)(3).

[2] 91 Fed. Reg. 55049 (Prop. Reg. § 1.951-1(b)(1)).

[3] 91 Fed. Reg. 55056 (Prop Reg. § 1.951- 1(h)).

[4] 91 Fed. Reg. 55049 (Prop. Reg. § 1.951A-1(d)(1)).

[5] 91 Fed. Reg. 55052 (Prop. Reg. § 1.951-1(e)(2)).

[6] 91 Fed. Reg. 55052 (Prop. Reg. § 1.951-1(e)(2)(i))(A)).

[7] 91 Fed. Reg. 55052 (Prop. Reg. § 1.951-1(e)(2)(i)(B)).

[8] 91 Fed. Reg. 55052 (Prop. Reg. § 1.951-1(e)(2)(ii)).

[9] 91 Fed. Reg. 55044, 55053 (Prop. Reg. § 1.951-1(e)(2)(iii)(A)).

[10] 91 Fed. Reg. 55058 (Prop. Reg. § 1.951-1).