OBBBA Changes to the Downward Attribution Rules- Is it Time for Portfolio Debt Planners to Rejoice?

The Internal Revenue Code Sections 951 and 951A state that U.S. shareholders of a controlled foreign corporation (“CFC”) may be assessed to the CFC’s Subpart F or global intangible low-taxed income (“GILTI”). A U.S. shareholder is defined as a U.S. person who owns, or is considered as owning at least 10 percent of the total combined voting power of all classes of stock entitled to vote in such CFC. Section 957(a) defines a CFC as a foreign corporation of which more than 50 percent value of its shares are owned by U.S. persons or the total combined voting power of all classes of stock entitled to vote are owned, directly, indirectly or constructively under the Section 958 ownership rules, by U.S. shareholders on any day during the foreign corporation’s tax year. In the CFC context, Section 958(b) provides that the constructive ownership rules of Section 318(a), with certain modifications, apply for purposes of determining whether: 1) a U.S. person is a U.S. shareholder; 2) a foreign corporation is a CFC under Section 957(a); and 3) a corporation or other person is related to the CFC.

The 2017 Tax Cuts and Jobs Act repealed Section 958(b)(4) of the Internal Revenue Code. As a result of the repeal of Section 958(b)(4), foreign corporations were able to be technically classified as CFCs without any direct U.S. ownership. For example, let’s assume that a foreign company (“Foreign Parent Company”) owns 100% of the shares in another foreign company (“Foreign Subsidiary Company”). Let’s also assume that the Foreign Subsidiary company owns 51% of a U.S. company (“U.S. Finance Subsidiary”), but only holds non-voting shares with the voting shares being held by an unrelated and independent third party. Let’s then assume that the Foreign Subsidiary Company makes loans to U.S. Finance Subsidiary that are intended to qualify for the portfolio interest exemption. If Foreign Parent Company were to directly or indirectly own a U.S. corporation or partnership that was not a subsidiary of Foreign Subsidiary Company, the Foreign Subsidiary Company may be classified as a CFC because the Foreign Subsidiary Company’s stock may be attributed from Foreign Parent Company down to the U.S. corporation or partnership directly or indirectly owned by Foreign Parent Company.

The One Big Beautiful Bill Act (“OBBBA”) enacted new Section 951B to the Internal Revenue Code. Beginning after December 31, 2025, Section 951B restored the downward attribution limitation of stock ownership of Section 958(b)(4) that was repealed by the 2017 Tax Cuts and Jobs Act. In certain cases, Section 951B will prevent foreign corporations with no direct U.S. shareholders from being classified as CFCs. However, Section 951B will not entirely prevent downward attribution to foreign entities. Section 951B will allow for downward attribution for Subpart F and GILTI inclusions to certain former U.S. shareholders of CFCs.

The restoration of the downward attribution limitation of stock ownership of Section 958(b)(4) will be particularly welcome foreign investors utilizing portfolio interest debt planning. Portfolio interest is typically used by foreign investors to minimize U.S. income tax and U.S. withholding taxes. As stated in the example above, portfolio debt planning often utilizes loans from a foreign company to a U.S. company. The repeal of Section 958(b)(4) resulted in possible attribution of stock under Section 318(a)(3) from a non-U.S. person to a U.S. person when portfolio planning took place. Section 951B may prevent such stock attribution in the future.

However, even with the enactment of Section 951B, foreign companies used in portfolio debt planning can still be classified as CFCs under the plan language of Sections 318(a)(2)(C), 318(a)(3)(C), and 318(a)(5)(A). Under these rules, Foreign Subsidiary Company discussed in the example above could still be classified as a CFC without any U.S. ownership in the structure since the Foreign Parent Company is deemed to own all the shares of the U.S. Finance Subsidiary under Section 318(a)(2)(C) which is deemed to own the Foreign Parent Company under Section 318(a)(5)(A) and under Section 318(a)(3)(C), since Foreign Parent Company owns more than 50% of the value of U.S. Finance Subsidiary, U.S. Finance Subsidiary may be deemed to own all the stock in Foreign Subsidiary Company that is owned by Foreign Parent Company. See Inbound Structuring For U.S. Estate Estate Latest And Greatest Structures and More, Robert H. Moore and Michael D. Melrose (2020).

Section 951B enacted by the OBBBA will certainly be welcomed by many cross-border debt planners. However, this newly enacted code section must be carefully reviewed with other provisions of the Internal Revenue Code when considering a portfolio debt structure.

Anthony Diosdi is an  international tax attorney at Diosdi & Liu, LLP. Anthony focuses his practice on providing tax planning domestic and international tax planning for multinational companies, closely held businesses, and individuals. In addition to providing tax planning advice, Anthony Diosdi frequently represents taxpayers nationally in controversies before the Internal Revenue Service, United States Tax Court, United States Court of Federal Claims, Federal District Courts, and the Circuit Courts of Appeal. In addition, Anthony Diosdi has written numerous articles on international tax planning and frequently provides continuing educational programs to tax professionals. Anthony Diosdi 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.