USA Update: IRS Proposes New CFC Pro Rata Share Rules. Daily Ownership Allocation Changes Form 5471 Reporting for International Sellers

by Ariful | Sep 19, 2026 | US Updates

TITLE: IRS Proposes Major Changes to CFC Income Allocation After Mid-Year Ownership Changes

IRS Proposes Major Changes to CFC Income Allocation After Mid-Year Ownership Changes

The IRS has proposed major changes to how U.S. shareholders calculate controlled foreign corporation income after a mid-year ownership change.

The central change is simple to describe but operationally significant: CFC income allocations would follow ownership during the year, rather than relying mainly on who owns shares on the final day.

This matters to international sellers, ecommerce brands, SaaS companies, digital agencies and growing groups connected to the United States. It can also affect foreign-owned structures with U.S. operations, including groups using Delaware, Wyoming, California, Texas or New Jersey entities and FBA inventory held in the United States.

First, correct the publication reference

The relevant CFC proposal is REG-115646-25, published in the Federal Register on 26 August 2026. You can read the official proposal through the Federal Register.

The Federal Register document numbered 2026-18645, published on 11 September 2026, concerns separate section 250 and section 904 foreign-source income rules. It is not the CFC pro rata share proposal.

This distinction matters when you update your compliance files, internal tax calendars and filing instructions. The CFC proposal is still proposed, but it is already important for planning Form 5471 data collection for foreign corporation tax years beginning after 31 December 2025.

What the IRS is changing

The proposal implements changes made by the One Big Beautiful Bill Act to sections 951 and 951A of the Internal Revenue Code.

It would revise how a U.S. shareholder determines its share of:

• Subpart F income.
• Tested income.
• Tested loss.
• Related ownership and stock information reported on Form 5471.

Under the previous approach, ownership on the last day of the CFC’s taxable year often drove the calculation. The proposed rules instead look at ownership during the relevant period.

A shareholder that owns stock on any day during a CFC year may need to calculate an inclusion for that ownership period. This means a shareholder can no longer assume that selling before year-end automatically removes its allocation.

The IRS has also proposed expanded reporting under section 6038. Form 5471 reporting would need to support the underlying ownership calculation, including stock classes, share movements and ownership changes during the annual accounting period.

Track ownership daily to avoid inaccurate allocations

The proposed rules introduce daily proration.

In a simple one-class structure with a constant number of shares, the calculation generally considers:

1. The shareholder’s percentage of shares.
2. The number of days the shareholder owned those shares.
3. The days when the shareholder was a U.S. shareholder.
4. The days when the foreign corporation was a CFC.

Where a shareholder holds different blocks of shares for different periods, each block is treated as a separate CFC year block.

This creates a practical issue for international sellers. The tax allocation may not match the commercial economics agreed between the parties.

For example, suppose a U.S.-incorporated ecommerce group owns a foreign CFC. A shareholder holds 40% of the CFC until 30 June and sells half of its holding to a new investor. The selling shareholder may still receive a share of the CFC’s annual tested income or Subpart F income for the days it held the shares.

The buyer may also receive an allocation for the remaining days. The CFC’s annual income is therefore divided by ownership period, even if the purchase agreement assumed that profits would be allocated only at completion or based on year-end ownership.

This is why you should not rely solely on closing accounts or a year-end shareholder register.

Close the CFC year when its status changes

The proposal would require a foreign corporation to close its taxable year for U.S. federal income tax purposes when a status change event occurs.

Broadly, this happens when the foreign corporation:

• Becomes a CFC; or
• Ceases to be a CFC.

The year closes at the end of the day on which the status change occurs.

This creates a clear dividing line for income, tested items, ownership and foreign tax calculations. It also means that a change in control can create more than a legal or commercial event. It can create an additional U.S. tax reporting period.

The proposal also allows an elective year closing when there is a significant ownership variance. Broadly, this involves specified transfers under the same plan that reduce section 958(a) U.S. shareholder ownership by more than 50 percentage points.

The election is not automatic. It includes procedural requirements:

• Enter into a written, binding agreement before filing the election statement.
• File an Elective Section 951 Year-Closing Statement with a timely original U.S. federal income tax return, including extensions.
• Apply the election consistently to all CFCs involved in significant ownership variances under the same plan.

You should identify this issue before a transaction closes. Waiting until Form 5471 preparation may leave insufficient time to obtain shareholder agreements or reconstruct the required ownership evidence.

Update Form 5471 workpapers before filing

The proposed section 6038 changes would require more detailed ownership information for Form 5471.

Your compliance file should be able to show:

• Each class of CFC stock.
• The number of shares outstanding on the first day of the annual accounting period.
• The date and description of every issuance, redemption or other share-count change.
• The balance of shares after each change.
• Each direct owner and relevant indirect U.S. shareholder.
• The date and description of acquisitions, receipts, redemptions, dispositions or other changes.
• The ownership balance immediately after each event.

This is a significant shift from collecting a final ownership percentage at year-end.

For international sellers trading from the United Kingdom, European Union, Canada or Australia into the United States, the first step is to identify whether a U.S. person, U.S. corporation or U.S. group member owns or controls a foreign corporation. Selling into the United States alone does not automatically make a foreign seller a CFC or create a Form 5471 filing obligation.

However, a U.S. group with foreign subsidiaries, a U.S. founder with foreign-company ownership, or a cross-border restructuring can create reporting requirements.

Check foreign tax allocations after a short U.S. tax year

A U.S. tax year closing may not close the foreign taxable year under local law.

Where that happens, the proposal would allocate part of the foreign income tax accruing in the following U.S. taxable year back to the short U.S. year. The allocation would use closing-of-the-books principles.

Withholding taxes are excluded from this rule.

This point is especially important where a group pays corporate income tax outside the United States. Your bookkeeping and tax workpapers should distinguish:

• Foreign income tax imposed on the CFC.
• Withholding taxes.
• The foreign taxable period.
• The shortened U.S. tax period.
• Income attributable to each closing date.

Doing this will help prevent foreign tax credit calculations from becoming disconnected from the underlying ownership and income periods.

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

by Ariful | Sep 17, 2026 | US Updates

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.