USA Tax Update: New CFC Pro-Rata Share Rules Change How US Shareholders Report Foreign Income , What International Sellers Must Know

TITLE: Proposed CFC Regulations Change How US Shareholders Calculate Income

On 26 August 2026, the US Treasury and IRS published proposed regulations that change how US shareholders calculate and report income from controlled foreign corporations (CFCs).

The proposal, REG-115646-25, was published in the Federal Register as 91 FR 55037. It implements One Big Beautiful Bill Act (OBBBA) changes to Sections 951(a) and 951A.

The key change is simple but important: ownership may now be measured by day, not just at the end of the CFC’s tax year.

This matters if you are a US citizen, green card holder, US shareholder, or owner of a US LLC with an interest in a UK Ltd, EU company, Canadian corporation, Australian entity, or another foreign trading business.

Understand the change: ownership days now drive income allocations

Under the legacy approach, a US shareholder generally needed to own CFC stock on the last relevant day of the CFC’s tax year to receive a Subpart F income inclusion.

The proposed regulations replace that approach for relevant CFC years with a daily proration method.

For Subpart F income, tested income, and tested loss, your allocation will generally reflect:

• The shares you owned.
• Your ownership percentage.
• The number of days you owned the shares.
• The days on which you were a US shareholder.
• The days on which the foreign corporation was a CFC.

For a CFC with one class of stock and a constant number of shares, the basic calculation is:

CFC income or loss × ownership percentage × qualifying ownership days ÷ days in the CFC year

The rules also introduce CFC year blocks. These are groups of shares owned for the same period during the CFC year.

This means a mid-year acquisition, disposal, share issue, or redemption can affect the calculation even if the business accounts are prepared annually.

Report the inclusion in the correct US tax year

The inclusion is generally reported in the US shareholder’s tax year that includes the last day on which the shareholder owned stock during the CFC year.

That timing point is essential.

For example, if you dispose of your foreign company shares on 30 June, the relevant inclusion may fall into the US tax year that includes 30 June. If another US shareholder acquires the shares on 1 July, that shareholder may report its own allocation in the tax year that includes the last day it owns the shares.

The proposed regulations clarify that the day of disposal is included in the seller’s holding period, while the day after the transfer begins the buyer’s holding period.

Prepare for mandatory CFC year closing after a status change

A foreign corporation’s tax year must close when it becomes or ceases to be a CFC.

The closing occurs at the end of the day on which the status change happens. It applies for all purposes of the Internal Revenue Code and affects all shareholders of the foreign corporation.

This rule can create a short CFC tax year.

You may need to calculate the foreign company’s Subpart F income, tested income, tested loss, earnings and profits, and relevant foreign taxes for the short period. Your bookkeeping and year-end records must support that calculation.

Do not assume that a transfer of shares only affects the seller. A CFC status change can affect the entire ownership structure and reporting process.

Use the 50-percentage-point election when ownership changes significantly

The proposed regulations also permit an election to close a CFC’s tax year when a significant ownership variance occurs.

Generally, this means that specified transfers under the same plan cause the aggregate ownership of one or more Section 958(a) US shareholders to decrease by more than 50 percentage points.

The election is not automatic.

The controlling Section 958(a) US shareholders must generally:

1. Identify the relevant ownership reduction.
2. Confirm that the transfer meets the proposed definition.
3. Obtain the required written, binding agreement where applicable.
4. File the required Elective Section 951 Year-Closing Statement.
5. Apply the election consistently to affected shareholders and relevant CFCs.

Related-party transfers and certain reorganisations may not produce the same result. The proposed regulations contain special rules to prevent artificial ownership changes from creating an elective closing.

See how daily proration affects an international seller

Example 1: A US person sells part of a UK Ltd ecommerce business

Assume a US person owns 100% of a UK Ltd that operates an online retail business. The company remains a CFC throughout 2026.

The shareholder sells 40% of the shares to an unrelated non-US buyer on 30 June. The US person retains 60%.

Assume:

• The UK Ltd has $100,000 of relevant Subpart F income for the year.
• The shareholder owns 100% for 181 days.
• The shareholder owns 60% for the remaining 184 days.
• The share count remains constant.
• The UK Ltd remains a CFC.

The approximate allocation is:

• $100,000 × 100% × 181/365 = $49,589.
• $100,000 × 60% × 184/365 = $30,247.
• Total approximate inclusion: $79,836.

The result is not based only on the shareholder’s ownership on 31 December. It reflects ownership over the relevant days.

Your exact calculation may differ because of share classes, tested income, tested loss, foreign exchange, CFC status, earnings and profits, and other statutory rules.

Example 2: A US person transfers an EU ecommerce entity and the company ceases to be a CFC

Assume a US person owns all the shares in an EU ecommerce company. On 30 June, the US person transfers all shares to a non-US individual. After the transfer, the company is no longer a CFC.

Under the proposed rules:

• The company’s CFC tax year closes at the end of 30 June.
• The US person’s ownership period runs through 30 June.
• The company must calculate relevant income and loss for the short CFC year.
• The US person reports the inclusion in the US tax year that includes 30 June.
• The company’s post-transfer period is outside that CFC year.

You should preserve the transfer agreement, completion statement, share register, board minutes, and financial records through the closing date. These documents support the short-period calculation and the ownership timeline.

Example 3: A US LLC has a significant ownership decrease

Assume a US LLC is treated as a corporation for US federal income tax purposes. It owns 80% of a foreign subsidiary and is a Section 958(a) US shareholder.

The LLC sells 60% of the subsidiary to an unrelated buyer under one transaction plan. Its ownership decreases from 80% to 20%, a reduction of 60 percentage points.

That may meet the proposed significant ownership variance test.

The LLC may be able to elect to close the CFC’s tax year at the end of the transfer date, subject to the proposed regulations’ documentation, agreement, filing, and consistency requirements.

If the US LLC is instead taxed as a partnership or disregarded entity, the analysis may focus on its members or owners. Confirm the entity classification before calculating the result.

Follow this transition checklist before your next filing

Start preparing now. This will reduce corrections and make the proposed rules easier to apply.

1. Map every foreign entity.
   Record whether you own a UK Ltd, EU entity, Canadian corporation, or other foreign business.
2. Identify your US shareholder status.
   Confirm whether you are a Section 958(a) shareholder under the proposed definition.
3. Track ownership days.
   Document the exact dates of any acquisition, sale, or transfer of shares during the CFC year.
4. Review CFC status changes.
   Determine whether any foreign corporation became or ceased to be a CFC during the year.
5. Calculate short-period income.
   Prepare earnings and profits, tested income, tested loss, and Subpart F figures for any closing period.
6. Assess the 50-percentage-point election.
   If ownership dropped by more than 50 percentage points, evaluate whether the election applies.
7. Gather documentation.
   Keep share registers, transfer agreements, board minutes, and financial records ready for the short-period and allocation calculations.
8. Consult a tax advisor.
   The proposed regulations contain special rules for related-party transfers, reorganisations, and entity classifications that may affect your result.