USA Update: IRS Opens the New Section 987 CFC Exemption Election : What International Sellers Must Know

TITLE: New Section 987 CFC Exemption Election: What International Groups Need to Know

The Treasury Department and IRS have proposed a new Section 987 CFC exemption election that could remove much of the recurring foreign currency gain and loss tracking for eligible controlled foreign corporations.

The relief is important for international sellers, ecommerce groups, digital businesses, and US companies with foreign branches or disregarded entities. However, the election does not remove every Section 987 obligation. It also does not replace other US filing duties, including Form 5472 reporting for certain foreign-owned US LLCs.

Here is what you need to know and what to do next.

Understand the new relief before you elect

On 14 August 2026, Treasury and the IRS issued proposed regulations REG-103844-26, published as 91 FR 52553, under Internal Revenue Code Section 987.

The proposed rules create a CFC exemption election. A CFC that makes the election becomes an “exempt CFC.”

Generally, an exempt CFC would not compute or recognise Section 987 foreign currency gain or loss on remittances from its qualified business units, or QBUs. These QBUs can include:

• Foreign branches.
• Disregarded entities.
• Operations with a functional currency different from the CFC’s functional currency.

This could significantly reduce the ordinary-course FX tracking burden. Treasury and the IRS estimate that the proposal could affect approximately 1,500 US entities that own CFCs with Section 987 QBUs. The estimated compliance saving is approximately $16 million annually, with around 20 to 60 hours saved per affected QBU each year.

The proposal is not yet final. Taxpayers may rely on it for taxable years beginning after 31 December 2024, provided the taxpayer, its consolidated group, and its Section 987 electing group apply the rules consistently.

Read the IRS update on Section 987 taxable income or loss and the IRS update on the CFC exemption election.

Keep Section 987 income calculations in place

The election is targeted. It does not eliminate Section 987 entirely.

Section 987(1) and Section 987(2) would continue to apply. An exempt CFC must still determine and translate its Section 987 taxable income or loss for purposes such as taxable income and earnings and profits.

The rules are applied as if a current rate election were in effect. This means the CFC would not generally need to track historic exchange rates for this purpose. QBU income or loss is translated using the yearly average exchange rate.

In practical terms, the election can stop ordinary remittance-based FX gain or loss recognition. It does not stop the need to calculate QBU taxable income or loss and maintain records supporting the calculation.

See how the election affects an international ecommerce group

Consider a US-parented ecommerce group with a UK subsidiary. The UK subsidiary has a branch whose functional currency is the euro.

Before the election, each remittance from the euro-functional branch to its owner could require Section 987 foreign currency gain or loss tracking. This creates recurring work around exchange rates, QBU balances, transfers, and remittance calculations.

If the eligible CFC makes the exemption election:

• Ordinary remittance-based Section 987 gain or loss generally stops.
• Section 987 taxable income or loss still needs to be determined and translated.
• Pre-election Section 987 gain or loss may need to be amortised over 120 months.
• Special inbound transaction rules can still create Section 987 gain.
• The group must apply the election consistently across relevant commonly controlled CFCs.

The result is a simpler operating process, but not a complete removal of cross-border compliance.

Calculate the pre-election amount before switching

In general, an exempt CFC must calculate its pre-election Section 987 gain or loss. The amount is then recognised ratably over 120 months, beginning with the first month of the first taxable year in which the election applies.

This means you should not assume that the election creates a clean break from all historical Section 987 positions. A pre-election gain or loss pool may continue through the transition period.

There is important relief for smaller QBUs. A QBU is generally treated as having zero pre-election Section 987 gain or loss if its average assets over the three preceding taxable years were less than $50 million. QBUs in the same country are aggregated for this test.

For example, a euro-functional QBU with average assets below $50 million over the relevant three-year period may not need to calculate a pre-election pool. Treasury estimates that this rule could exempt about 75% of Section 987 QBUs from the pre-election pool calculation.

You should still document:

• The QBU’s country of residence.
• The average assets for each of the three preceding taxable years.
• Any same-country QBUs that must be aggregated.
• The balance sheet information supporting the calculation.

Watch the inbound transaction exception

The exemption does not prevent all Section 987 gain recognition.

Gain must still be recognised in certain inbound nonrecognition transactions. These include:

• A Section 332 liquidation.
• A Section 368(a)(1) asset acquisition where a domestic corporation acquires the assets of an exempt CFC.

In these cases, the transferor CFC recognises Section 987 gain equal to its Section 987 asset basis. There is no corresponding loss recognition rule.

The proposed regulations allow two methods for calculating the Section 987 asset basis:

1. A lookback methodology using a 72-month lookback period.
2. The excess asset basis methodology under Section 367(b)-3(g)(2)(i).

A de minimis rule applies where the transferor CFC’s inside asset basis is less than $25 million. In that situation, the Section 987 asset basis calculation and related gain recognition rules do not apply.

This matters when an international group is considering a restructuring, liquidation, or transfer of foreign assets into a domestic corporation. The election may simplify normal operations, but it should not be treated as a way to move currency-related basis into the United States without a gain calculation.

Apply the election consistently across the group

The election is not designed to be selected separately for whichever CFC produces the most favourable result.

The proposed regulations require consistency across commonly controlled CFCs. This includes relevant affiliated domestic corporations that are treated as a single US person for the election rules.

There are also anti-avoidance rules for related-party transactions. These rules can prevent a group from using internal transactions to:

• Trigger a deemed revocation.
• Avoid applying the election to a CFC.
• Change the election position without a genuine commercial change.

Review the full ownership structure before filing. Include CFCs held through relevant domestic partnerships and consider how acquisitions, disposals, and internal reorganisations may affect the election.

The election cannot be revoked without the Commissioner’s consent. Also, if the election ceases within the first 60 months, pre-election loss is suspended rather than immediately recognised.

File the correct forms and document the position

Making the election is not just a planning decision. It needs to be reflected in the relevant returns and supporting records.

Before filing, confirm:

• Which CFCs are eligible and included in the electing group.
• Whether the election is made for the first eligible taxable year or a later year.
• How the election is reported on the relevant returns and statements.
• What supporting calculations are required for pre-election gain or loss, including the $50 million asset test.
• Whether any inbound transaction or de minimis rules apply during the year.
• How the position interacts with other international reporting, including Form 5472 where relevant.

Because the regulations are proposed, taxpayers relying on them must apply the rules consistently. Inconsistent application across the group can put the relief at risk.

Action items for international groups

If your group owns CFCs with Section 987 QBUs, the practical next steps are:

1. Map every QBU by entity, country, and functional currency.
2. Identify which CFCs are commonly controlled and would need to elect consistently.
3. Calculate or estimate average QBU assets over the three preceding taxable years to test the $50 million threshold.
4. Model any pre-election Section 987 gain or loss and the 120-month recognition period.
5. Review planned restructurings, liquidations, or inbound asset transfers for the gain recognition exception and the $25 million de minimis rule.
6. Confirm return reporting and recordkeeping requirements before relying on the proposed regulations.
7. Coordinate with your tax advisers on timing, consistency, and any interaction with other US filing obligations.

The proposed CFC exemption election offers meaningful simplification for groups with foreign branches and disregarded entities. It does not remove Section 987 income calculations, pre-election gain or loss recognition, or inbound transaction gain rules. Treat it as a targeted relief that needs to be planned, documented, and applied consistently, not as a blanket exemption from cross-border currency compliance.