On January 25, 2022, the Internal Revenue Services issued final regulations relating to the treatment of stock owned by domestic partnerships under certain provisions of subpart F of the Internal Revenue Code (“Subpart F”). These regulations could substantially impact the tax treatment of partners of such partnerships.
Background on Foreign Corporations and the U.S. International Tax System
U.S. citizens, resident aliens, and domestic corporations generally are subject to federal income tax on worldwide income.
On the other hand, foreign corporations typically are subject to federal income tax only on income 1) that is effectively connected with the conduct of a U.S. trade or business and 2) certain types of U.S. source income.
In general, section 965 of the Code requires United States shareholders, as defined under section 951(b) of the Code, to pay a transition tax on the untaxed foreign earnings of certain specified foreign corporations as if those earnings had been repatriated to the United States. Very generally, section 965 of the Code allows taxpayers to reduce the amount of such inclusion based on deficits in earnings and profits with respect to other specified foreign corporations. The effective tax rates applicable to such income inclusions are adjusted by way of a participation deduction set out in section 965(c) of the Code. A reduced foreign tax credit applies to the inclusion under section 965(g) of the Code. Taxpayers, pursuant to section 965(h) of the Code, may elect to pay the transition tax in installments over an eight-year period. Generally, a specified foreign corporation means either a controlled foreign corporation, as defined under section 957 of the Code (“CFC”), or a foreign corporation (other than a passive foreign investment company, as defined under section 1297 of the Code, that is not also a CFC) that has a United States shareholder that is a domestic corporation.
According to IRC Section 965 domestic partnerships, s – corporations, passthrough entities are required to report information to partners, shareholders and/or beneficiaries in connection with the code. A domestic partnership, S corporation, pass-through entities or other passthrough entity should attach a statement to its Schedule K-1s, if applicable, that includes the following information for each deferred foreign income corporation for which such passthrough entity has a section 965(a) inclusion amount: