OBBA Giveth and Taketh Away Section 958(b)(4) Downward Attribution Rules

Section 951B was recently enacted by the One Big Beautiful Bill Act (“OBBA”). Section 951B establishes a parallel tax and reporting regime for U.S. shareholders of foreign corporations. The foregoing discussion is intended to provide the reader with a basic understanding of Internal Revenue Code Section 951B in the context foreign corporations and U.S. shareholders.

Defining CFCs and U.S. Shareholders

We will begin this article by defining foreign corporations and U.S. shareholders along with the importance of these classifications.

Section 957(a) defines a controlled foreign corporation (“CFC”) as a foreign corporation of which more than 50 percent of the voting power or value of a foreign corporation is owned, directly, indirectly or constructively under the Section 958 ownership rules by “U.S. shareholders.” Section 951(b) defines a “U.S. shareholder” as a U.S. citizen, resident alien, corporation, partnership, trust or estate, owned directly, indirectly or constructively under the ownership rules of Section 958, ten percent or more of the total combined voting power or value of all classes of stock of the foreign corporation.

If a foreign corporation is classified as a CFC, the U.S. shareholders will be subject to the Subpart F or Global Intangible Lowed Income (“GILTI”)/Net CFC Tested Income (“NCTI) tax regimes. The computation of the tax associated with Subpart F income, GILTI, and NCTI are slightly different. But, all these tax regimes have one thing in common, these tax regimes are anti-deferral in nature and they are all computed based on a so-called hypothetical dividend distribution of a CFC. The hypothetical dividend tax associated with these anti-deferral provisions of the Internal Revenue Code often triggers harsh tax consequences to U.S. shareholders.

Application of the Indirect CFC Ownership Rules of Section 958

Given the significant tax consequences associated with the anti-deferal regime, it is important to determine whether a U.S. person meets the Section 951(b) definition of a U.S. shareholder and whether a foreign corporation meets the Section 957(a) definition of a CFC. Section 958 of the Internal Revenue Code applies direct, indirect, and constructive ownership rules to determine stock ownership in foreign corporations.

Section 958(a)(1) provides the direct ownership for determining stock ownership for such purposes. Section 958(a)(2) provides indirect ownership rules to determine beneficial ownership of shares when a foreign entity is interposed between a U.S. person and a foreign corporation. Specifically, stock of a foreign corporation owned, in turn, by another foreign corporation or by a foreign partnership, trust or estate is determined to be owned proportionately by the latter’s shareholders, partners or beneficiaries

Section 958(b) applies (with some modifications) the constructive ownership rules of Section 318(a) of the Internal Revenue Code. These constructive ownership rules of Section 318(a) require attribution of stock between certain family members and between corporations, partnerships, trusts and estates, on the one hand, and their shareholders, partners or beneficiaries, on the other. Prior to the enactment of the 2017 Tax Cuts and Jobs Act, Section 958(b)(4) disallowed downward attribution associated with Section 318(a)(3)(C), 318(a)(3)(B) and Section 318(a)(3)(C). Section 958(b)(4) prevented the attribution of stock to a U.S. person who is not a U.S. person and stock in a foreign corporation.

Section 958(b)(4) prevented the following result: If a foreign person wholly owned all of the stock in each of a domestic corporation (“Domestic Sub”) and a foreign corporation (“Foreign Sub”), Section 318(a)(3)(C) would cause the foreign person to attribute its shares of Foreign Sub to Domestic Sub, thereby making Foreign Sub a CFC of Domestic Sub for U.S. tax purposes.

Section 958(b)(4) Repealed by the 2017 Tax Cuts and Jobs Act

The 2017 Tax Cuts and Jobs Act repealed Section 958(b)(4) eliminating the restrictions on “downward attribution.” Downward attribution is where the stocks owned by a shareholder is “attributed” or deemed to be owned by a corporation in which they hold an interest. It effectively treats a U.S. subsidiary as being owning foreign stocks held by its foreign parent thus triggering CFC status. This change significantly expanded the definition CFC, often causing foreign “brother sister” corporations to be classified as CFCs, creating unexpected Form 5471 filing requirements to U.S. tax consequences to U.S. shareholders. Rev. Proc 2019-40 mitigated some of the unintended consequences of the repeal of Section 958(b)(4). However, in many cases did little to resolve impossible information reporting problems associated with the repeal of Section 958(b)(4).

OBBA Kind of Restores Section 958(b)(4)

The One Big Beautiful Bill Act (“OBBA”) restores Section 958(b)(4) for tax years beginning after December 31, 2025, limiting downward attribution of stock ownership from foreign to U.S. persons which reduces so-called supreme CFC status. At first glance, it appears that CFC filing compliance has been significantly simplified in 2026, then came the enactment of Internal Revenue Code Section 951B. To address concerns of tax avoidance, Section 951B was enacted. Section 951B applies to Foreign-Controlled U.S. Shareholder” (“FCUSS”) who own more than 50% of a CFC. Section 951B targets FCUSS of foreign controlled foreign corporations (“FCFCs”). Section 951B is intended to ensure that U.S. persons who are themselves controlled by foreign corporations, and who in turn control foreign corporations are subject to the Subpart F and NCTI tax regimes, even if the foreign corporation is not classified as a CFC under Section 957(a).

Section 951B provides an exception to Section 958(b)(4) and allows downward attribution in limited cases applicable to FCUSS of a FCFC as if the FCUSS were a U.S. shareholder and the FCFC was a CFC for purposes of applying Subpart F income and NCTI. Section 951B has modified the definition of a U.S. shareholder under Section 951(b) in certain cases of more than 50% of a CFC rather than the standard 10% definition. It is possible that a foreign corporation will be classified as a FCFC due to downward attribution rules of Section 951B and that the FCUSS will not be subject to Subpart F income or NCTI tax. It remains unclear in these situations if the filing of a Form 5471 is still required. While the reinstatement of Section 958(b)(4) is welcome to many, Section 951B just added an entirely new level of complexity to international tax obligations and international tax reporting requirements for the shareholders of foreign structures.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.