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:
- The shareholder’s percentage of shares.
- The number of days the shareholder owned those shares.
- The days when the shareholder was a U.S. shareholder.
- 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.
