Unintended consequences of the repeal of § 958(b)(4) and proposed solutions

Abstract

The Tax Cuts and Jobs Act of 2017 repealed §958(b)(4) (the Repeal), which prevented a U.S. person from constructively owning stock owned by a non-U.S. person in determining if a corporation is a controlled foreign corporation (CFC). After the Repeal, a U.S. corporation owned by a foreign corporation is considered to own stock in a foreign affiliate owned by the foreign parent. Thus, the foreign affiliate can be considered a CFC of the U.S. subsidiary even if the U.S. subsidiary does not own directly or indirectly any shares in the foreign affiliate. These changes caused unintended negative consequences for foreign multinational corporations with U.S. subsidiaries. Even though some measures have been taken to mitigate these consequences, issues remain. This article discusses problems caused by the Repeal that affect foreign corporations with U.S. subsidiaries and proposes solutions.