IRS proposes new rules for CFC pro rata share calculations

The Internal Revenue Service issued a notice of proposed rulemaking (Reg-115646-25, RIN 1545-BR77) to amend 26 CFR part 1. The proposed regulations would affect shareholders of foreign corporations, including United States shareholders of controlled foreign corporations. Written or electronic comments must be received by October 26, 2026.

The authority for the proposal derives from sections 951 and 951A of the Internal Revenue Code and the transition rule in section 70354(c)(2) of Public Law 119-21, 139 Stat. 72 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act (OBBBA). The OBBBA amended sections 951(a) and 951A for taxable years of foreign corporations beginning after December 31, 2025.

Under the OBBBA revisions, section 951(a)(1)(A) now requires a U.S. shareholder to include its pro rata share of a CFC's subpart F income if the corporation is a CFC at any time during the CFC year and the shareholder owns stock on any day during that year. This replaces the former last-relevant-day limitation. Section 951(a)(3) mandates that the inclusion be taken in the U.S. shareholder's taxable year that includes the last day the shareholder owned the CFC stock during the CFC year.

Section 951A(a) similarly requires inclusion of net CFC tested income, defined as the excess of the aggregate pro rata share of tested income over the aggregate pro rata share of tested loss. The pro rata shares of tested items are to be determined under the rules of section 951(a)(2), mirroring the subpart F methodology, and are taken into account in the taxable year specified by section 951(a)(3).

For taxable years before the OBBBA amendments take effect, the notice retains a transition rule that governs the determination of pro rata shares of subpart F income and tested items. The transition rule limits the treatment of certain dividends for purposes of applying former section 951(a)(2)(B).