To amend the Internal Revenue Code of 1986 to restore the limitation on downward attribution of stock ownership in applying constructive ownership rules.

Bill Summary

What the bill does, in plain terms: It rewrites part of the international tax rules to undo a 2017 change that unexpectedly swept many foreign corporations into the “controlled foreign corporation” (CFC) regime through what’s called downward attribution. At the same time, it installs a narrower, more targeted backstop so that U.S. subsidiaries that are effectively controlled by a foreign parent can still be required to pick up Subpart F and GILTI income when they are, in substance, in control of a foreign affiliate.

How the current law got here: Before 2017, the tax code blocked “downward attribution” from a foreign person to a U.S. person when determining whether a foreign company was a CFC and who counted as a “U.S. shareholder.” That rule lived in section 958(b)(4). The 2017 tax law (TCJA) repealed that limitation. As a result, when a foreign parent owned both a U.S. subsidiary and a foreign subsidiary, the U.S. subsidiary could be treated as constructively owning the foreign subsidiary’s stock—even if it had no actual ownership—making the foreign subsidiary a CFC. That triggered Subpart F and GILTI inclusions and extensive reporting for many U.S. companies that didn’t truly control those foreign corporations, producing compliance burdens and “phantom income” issues.

What this bill changes:

- It restores the pre-2017 limitation in section 958(b) by adding a new paragraph (4) that once again says you cannot use the constructive ownership rules to treat a U.S. person as owning stock that is actually owned by a non-U.S. person. In short, foreign-to-U.S. downward attribution is shut off again, so many foreign corporations will no longer be deemed CFCs solely because a foreign parent owns a U.S. subsidiary.

- To prevent genuine tax avoidance opportunities that could come from simply undoing the 2017 change, the bill creates a new section 951B. This new section builds a parallel, targeted regime for “foreign controlled United States shareholders” (U.S. persons that, using constructive rules without the restored limitation, would be treated as owning more than 50%—not just 10%—of a foreign corporation) and “foreign controlled foreign corporations” (foreign corporations that would be CFCs if you applied that more-than-50% standard and allowed attribution).

- Under section 951B, the traditional anti-deferral rules apply to this narrower group:

• Subpart F (other than sections 951A, 951(b), and 957) applies with terms substituted so that “foreign controlled United States shareholders” and “foreign controlled foreign corporations” are the relevant actors.

• GILTI (section 951A) also applies by treating references to U.S. shareholders and CFCs as including these new foreign-controlled counterparts. In practice, if a U.S. subsidiary of a foreign group is, in substance, the majority owner of a foreign affiliate under constructive rules, it will still have to include Subpart F and GILTI amounts.

- The Treasury is given authority to issue regulations to implement and prevent avoidance, including the ability to treat these foreign-controlled categories as U.S. shareholders/CFCs for other parts of the Code where needed (for example, coordinating with other international provisions and reporting rules).

Why it matters: The bill is trying to strike a balance. It removes the sweeping attribution rule from 2017 that made many companies do complex CFC/GILTI compliance without real control or economic ownership. That should significantly reduce compliance burdens and inadvertent inclusions for U.S. companies, particularly those that are subsidiaries within foreign-parented groups. But it doesn’t open the door to shifting income into lightly-owned foreign affiliates to avoid U.S. anti-deferral regimes; the new 951B regime keeps Subpart F and GILTI in place where there is effective majority control by a U.S. entity within a foreign-parented structure.

Key thresholds and mechanics: The new backstop only applies when the U.S. person would be treated as owning “more than 50 percent” of the foreign corporation under constructive rules (and with downward attribution allowed for that determination). That is a higher bar than the usual 10% definition of a U.S. shareholder, which means many of the minor or incidental ownership situations that created headaches under current law will be outside the net, while true control situations remain covered.

Effective date: The changes apply to the last taxable year of foreign corporations beginning before January 1, 2025, and to U.S. persons’ taxable years in which or with which those foreign corporations’ taxable years end. There’s a “no inference” clause to avoid implying how prior law should have applied in earlier years.

Bottom line: This bill would largely restore the pre-2017 landscape by turning off foreign-to-U.S. downward attribution for CFC determinations, but it pairs that relief with a tailored regime to ensure that U.S. subsidiaries that are effectively majority owners of foreign affiliates still have to pick up Subpart F and GILTI income. It aims to reduce unintended compliance burdens while preserving protections against profit shifting and base erosion.

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