On August 26, 2026, the U.S. Department of the Treasury published proposed regulations (REG-115646-25) implementing international tax provisions of the One Big Beautiful Bill Act ("OBBBA"). These proposed regulations change how U.S. shareholders determine their pro rata share of Controlled Foreign Corporation ("CFC") income for Subpart F and Net CFC Tested Income ("NCTI") purposes under Internal Revenue Code ("IRC") sections 951 and 951A.
Background
The OBBBA revised the mechanisms for calculating Subpart F and NCTI inclusions for taxable years of foreign corporations beginning after December 31, 2025.
Before the OBBBA, income inclusion from a CFC under IRC sections 951 and 951A turned on the application of a "last day of the year" ownership test. Under this test, a U.S. shareholder was generally required to include in gross income its pro rata share of a CFC's Subpart F and NCTI income only if the shareholder held CFC stock on the last day of the CFC's taxable year. Under this test, taxpayers could shift significant tax liabilities through mid-year transfers, which prompted the Department of the Treasury to implement complex anti-abuse rules, including the extraordinary reduction rules under Section 245A.
The OBBBA replaced this test with a widely applicable period-based ownership model. Under this model, absent a significant ownership change (in which case a "closing-of-the-books" election is available), a U.S. shareholder that owns stock in a foreign corporation at any time such corporation qualifies as a CFC must include in gross income its pro rata share of the CFC's Subpart F and NCTI income.
The OBBBA granted the Department of the Treasury the authority to promulgate regulations clarifying the application of these changes. Recently, the Department of the Treasury has issued proposed regulations under that authority. However, these proposed regulations do not yet have the force of law and are not legally binding. Proposed Treasury regulations must go through a formal notice and comment period before they can become final rules.
The Proposed Regulations
The key aspects of the proposed regulations are summarized below.
The Daily Proration Rules for Calculating Ownership Shares
Under the proposed regulations, a U.S. shareholder's pro rata share of CFC income is determined based on the portion of the CFC's taxable year during which (i) the shareholder owned the stock, (ii) the shareholder qualified as a U.S. shareholder, and (iii) the foreign corporation qualified as a CFC. The inclusion is recognized in the U.S. shareholder's taxable year that includes the last day on which the shareholder owns CFC stock during the CFC's taxable year. For purposes of this calculation, the seller of CFC stock is treated as owning the stock through the date of transfer; the buyer's ownership begins the following day.
A U.S. shareholder's pro rata share is calculated based on the shareholder's ownership percentage during the relevant period, using the following formula: Pro rata share = CFC annual income x ownership percentage x (qualifying ownership days / total CFC taxable year days).
Status Change Events and Elective Year Closings
If the proposed regulations go into effect, a foreign corporation would be required to close its taxable year for all purposes when it either becomes or ceases to be a CFC. The proposed regulations call this mandatory year closing a "status change event." Closing the tax year after a status change event prevents income earned during periods when the corporation was not a CFC from affecting a U.S. shareholder's pro rata share.
The proposed regulations also permit controlling U.S. shareholders to elect to close a CFC's taxable year (a "closing-of-the-books" election) when a "significant ownership variance" occurs. A significant ownership variance arises when stock transfers made pursuant to a plan reduce a U.S. shareholder's ownership by more than 50 percentage points. To determine whether this threshold is met, increases in ownership by related U.S. persons generally offset any decrease. In practice, this means the election is not available for related-party transfers.
Other Notable Provisions Under the Proposed Regulations
- Expanded reporting requirements. Form 5471 would require U.S. persons to disclose detailed information about each class of CFC stock, changes in outstanding shares, and all direct and indirect ownership changes during the annual accounting period.
- Multi-class stock. Special rules would apply to CFCs with multiple classes of stock, including allocating income among classes through a hypothetical distribution framework and daily proration within each class.
- Coordination with Section 951B. The regulations clarify that the same daily proration rules should apply to foreign-controlled U.S. shareholders ("FCUSSs") of foreign-controlled foreign corporations ("FCFCs").
- Transition rules. Certain dividends paid or deemed paid by a CFC during the transition period (CFC taxable years that include June 28, 2025, or begin after that date and before the first taxable year beginning after December 31, 2025) would not be treated as dividends for purposes of former Section 951(a)(2)(B), to the extent the dividend does not increase the taxable income of a U.S. person. U.S. shareholders claiming this reduction must attach a "Pro Rata Share Transition Rule Statement" to Form 5471.
Areas Not Addressed: PTEP and Section 1248
Interaction of the new pro rata share rules with previously taxed earnings and profits ("PTEP") under Sections 959 and 961 is not addressed in the proposed regulations. The PTEP regulations were originally premised on the former versions of Sections 951 and 951A. The proposed regulations also do not directly address how the new pro rata share rules coordinate with the treatment of gain on dispositions of CFC stock under Section 1248.
The Department of the Treasury has indicated that separate modified guidance for these Sections may be forthcoming. Until that guidance is issued, taxpayers should exercise caution when applying the new allocation framework alongside existing PTEP and Section 1248 rules, as those rules have not yet been conformed to the OBBBA changes.
Implications for U.S. Multinational Enterprises with CFCs
The proposed regulations represent the first major regulatory implementation of OBBBA's international tax reforms. Taxpayers may rely on the proposed regulations as interim guidance before finalization, provided they apply the rules fully and consistently. The comment period closes on October 26, 2026, and the Department of the Treasury expects to finalize the regulations by January 4, 2027.
To conform with the new guidance, clients should review and update their ownership-tracking systems to accommodate day-by-day tracking of CFC stock ownership, status changes, and share-count changes. Buyers and sellers of CFC stock should evaluate the impact of the proposed regulations on pending or recently completed transactions, particularly tax covenants and indemnity provisions.
The transition rule's substantiation requirement creates an immediate compliance obligation for any CFC that paid dividends during the transition period, and clients should begin gathering the information needed for Form 5471 reporting. Clients with active transactions should also consider taking advantage of the interim reliance provision, provided that they and their related parties are prepared to apply the proposed regulations in their entirety and consistently.
How Venable Can Help
If you have questions about the proposed regulations, please contact the authors. Because the proposed regulations may be revised before finalization, affected taxpayers should monitor developments and consider submitting comments during the comment period.
Venable's tax team can assist clients by reviewing how the new daily proration rules affect their CFC ownership structures, evaluating compliance obligations under the expanded Form 5471 reporting requirements, and advising on M&A transaction documentation considering the new framework.
Finally, in the whack-a-mole world of tax administration, every new anti-abuse provision creates other opportunities. We look forward to helping you find them.