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The IRS announced its intention to issue proposed regulations under Section 960(d)(4) in Notice 2025-77 (PDF - 97 KB), issued on Dec. 4. Section 960(d)(4), enacted as part of the One Big Beautiful Bill Act (OBBBA), disallows 10% of foreign tax credits (FTC) associated with certain distributions of previously taxed earnings and profits (PTEP) attributable to Section 951A inclusions.
Prior to enactment of the OBBBA, Section 960(d)(1) provided a 20% haircut on foreign tax credits attributable to 951A inclusions. However, no comparable limitation applied to direct foreign tax credits associated with PTEP distributions. The OBBBA reduced the haircut from 20% to 10% and extended its applicability to such PTEP credits.
Notice 2025-77 clarifies the effective date of Section 960(d)(4). Specifically, Section 960(d)(4) applies to foreign income taxes paid or accrued (or deemed paid under Section 960(b)(1)) with respect to a Section 959(a) distribution, to the extent the underlying PTEP results from a Section 951A inclusion of a U.S. shareholder in a taxable year ending after June 28, 2025. The relevant taxable year for this purpose is that of the U.S. shareholder.
A Section 951A inclusion may include tested income of a controlled foreign corporation (CFC) from a taxable year of the CFC that ends on or before June 28, 2025. (For example, a Section 951A inclusion for a U.S. shareholder’s taxable year ending Dec. 31, 2025, may include tested income from a CFC taxable year ending May 31, 2025.)
The notice further explains that the Section 951A PTEP group set forth in Treas. Reg. §1.960-3(c)(2)(viii) will be divided into two groups:
- PTEP resulting from Section 951A inclusions in a taxable year shareholder ending on or before June 28, 2025 (pre–June 29, 2025, section 951A PTEP), and
- PTEP resulting from section 951A inclusions in a taxable year ending after June 28, 2025 (post–June 28, 2025, section 951A PTEP).
Ten percent of foreign income taxes paid or accrued (or deemed paid under Section 960(b)(1)) with respect to a Section 959(a) distribution of post–June 28, 2025, section 951A PTEP is disallowed.
Taxpayers may rely on the guidance provided in this notice prior to the issuance of the proposed regulations, provided that they apply the guidance in its entirety and consistently for all eligible taxable years.
Grant Thornton insight:
Taxpayers should review their PTEP tracking systems to ensure that Section 951A PTEP is properly segregated and carefully analyze PTEP distributions to determine whether they are attributable to post–June 28, 2025, Section 951A PTEP and therefore subject to the 10% FTC disallowance under Section 960(d)(4).
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