Proposed rules reshape CFC pro rata share calculations

Key elements of the proposed regulations

1. Daily proration becomes the default allocation method

Proposed Section 1.951-1(e) allocates a CFC’s annual Subpart F income based on the shareholder’s proportionate ownership and the number of days in the CFC year during which the foreign corporation is a CFC and the shareholder both owns stock in the CFC and is a U.S. shareholder with respect to it. Tested income and tested losses generally would follow the same approach under proposed Section 1.951A-1(d).

The daily proration rules generally would operate as follows:

• Single class, constant shares: The shareholder generally multiplies the CFC's Subpart F income by its percentage ownership and by a day-count fraction. Separate “CFC-year blocks” are used when the shareholder owns different groups of shares for different periods.
• Multiple classes: The CFC first allocates income among classes based on a hypothetical distribution of allocable earnings and profits on the last day of the CFC year. The daily proration method then applies within each class.
• Changing share count: If issuances, redemptions or other events change the outstanding share count, the denominator generally becomes a weighted average of shares outstanding during the CFC year.
• Anti-abuse rule: Adjustments would be required to disregard a transaction or arrangement undertaken as part of a plan with a principal purpose of avoiding federal income tax by changing the allocation in the hypothetical distribution.

2. CFC status changes would trigger a mandatory year closing

Proposed Section 1.951-1(d)(1) requires a foreign corporation's taxable year to close for all shareholders and all purposes of the Internal Revenue Code when the corporation becomes or ceases to be a CFC. The year would close at the end of the last day on which the corporation is not a CFC, in the case of becoming a CFC, or the last day on which it is a CFC, in the case of ceasing to be a CFC. Special rules would disregard certain domestic partnership and option attribution in testing whether the status change occurs.

As this mandatory closing applies for U.S. tax purposes, the corporation’s taxable year under foreign law may continue beyond the closing date. In that case, the proposed regulations would allocate to the short U.S. taxable year the portion of the foreign income taxes for the overlapping foreign-law taxable year that is attributable to income earned through the closing date. That portion would be determined using a closing-of-the-books method based on taxable income under foreign law.

The proposed regulations also clarify that closing a foreign corporation’s taxable year generally would not, by itself, close the taxable year of a partnership in which the corporation is a partner.

3. Elective closing would be available for certain control shifts

If a foreign corporation remains a CFC, its controlling Section 958(a) U.S. shareholders could elect to close the CFC's taxable year upon a “significant ownership variance.” A significant variance generally would occur when specified transfers undertaken pursuant to the same plan during the same default CFC year reduce the aggregate ownership of the affected Section 958(a) U.S. shareholders by more than 50 percentage points, measured by vote or value. Specified transfers include sales, exchanges and redemptions of stock or partnership interests, as well as issuances and certain changes resulting from contributions.

The election also would be subject to the following requirements:

• Related-person limitations: Ownership generally is not treated as decreasing to the extent a related U.S. person has a corresponding increase. Certain F reorganizations also are disregarded.
• Agreement and statement: The controlling Section 958(a) U.S. shareholders and each other Section 958(a) shareholder that owned CFC stock on any day through the significant ownership variance generally must enter into a written, binding agreement.  Each controlling shareholder must file an “Elective Section 951 Year-Closing Statement” with a timely filed original return, including extensions.
• Group consistency: If significant ownership variances occur for multiple CFCs under a plan or series of related transactions, the election is available only if made for every affected CFC.

Other elements of the proposed regulations

The proposed regulations also include other elements, such as the following:

• Section 951B generally applies the Subpart F rules to certain foreign-controlled U.S. shareholders (FCUSSs) of foreign-controlled foreign corporations (FCFCs). The proposed Section 951 and 951A rules would apply in that setting. A mandatory year closing could occur when a foreign corporation changes among CFC, FCFC and neither status. The elective closing generally would not be available to an FCUSS because an FCUSS cannot own the more-than-50-percent interest needed for a significant ownership variance in an FCFC.
• Proposed Section 1.6038-2(f)(8) would require information designed to support the daily allocation rules. The information would include the number of shares of each class outstanding at the beginning of the annual accounting period; dates and amounts of issuances, redemptions and other changes; and the balance after each change. Similar acquisition, disposition and running-balance data would be required for direct owners and indirect U.S. shareholders that own stock at any time during the period.
• The Section 245A extraordinary reduction rules would phase out.
• Proposed Section 1.951-4 would implement the transition rule announced in Notice 2025-75. The rule applies to specified dividends paid or deemed paid in a CFC taxable year that includes June 28, 2025, or that begins after June 28, 2025, but before the CFC's first taxable year beginning after Dec. 31, 2025.

Applicability and reliance

The proposed rules would generally apply to taxable years of foreign corporations beginning after Dec. 31, 2025, and are subject to a comment period that could result in changes before final rules are issued. The comment period for this rule proposal closed Oct. 26, 2026.

Special effective-date rules would coordinate the application of the revised Section 951(a)(2) allocation rules with the effective date of the net CFC tested income provisions. Before the regulations are finalized, taxpayers may rely on the proposed rules only if the taxpayer and its related parties apply all aspects of the proposed regulations in their entirety and consistently.