On June 21, 2019, the IRS and Treasury Department published final regulations (the “Final Regulations”) in the Federal Register that would generally treat domestic partnerships as aggregates in determining whether income must be recognized under the U.S. “global intangible low-taxed income” (“GILTI”) rules. The Final Regulations differ significantly from the “hybrid aggregate/entity” approach that was taken in the proposed GILTI regulations that were issued in October 2018. On the same day, the IRS and Treasury Department published proposed regulations (together with the Final Regulations, the “Final and Proposed Regulations”) that would extend this “aggregate” treatment to the so-called “subpart F” rules, something that would represent a significant change to the treatment of domestic partnerships under subpart F. The Final and Proposed Regulations modify the U.S. “controlled foreign corporation” (“CFC”) regime in the following ways:
- First, U.S. persons that directly, indirectly and constructively own less than 10% of a CFC (“Sub-10% Holders”) through a domestic partnership that owns 10% or more of the CFC would generally not be required to recognize subpart F or GILTI inclusions from that CFC, meaning that the importance of “structuring out” of the CFC income inclusion regime (e.g., by organizing fund vehicles in a non-U.S. jurisdiction) may be reduced.
- Second, it appears likely that Sub-10% Holders of a CFC that both (i) qualifies as a “passive foreign investment company” (“PFIC”) and (ii) is owned through a domestic partnership will be taxed under the PFIC rules rather than the CFC regime.
The Final and Proposed Regulations do not change the fact that a domestic partnership that owns 10% or more of a foreign corporation technically can be a “United States shareholder” of a foreign corporation under Section 951(b) of the Code or affect whether a foreign corporation technically is a CFC.