IRS provides guidance on Sec. 951(a)(2)(B) transition rule

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The IRS issued Notice 2025-75 (PDF - 120 KB) on Dec. 4, announcing its intention to issue proposed regulations on the transition rule for dividends under Section 951(a)(2)(B), which permits a U.S. shareholder to reduce its pro rata share of a controlled foreign corporation’s (CFC) Subpart F income or tested income by the amount of distributions received by any other person during the taxable year with respect to stock acquired during that year.

The One Big Beautiful Bill Act (OBBBA) amended Sections 951(a) and 951A for taxable years of foreign corporations beginning after Dec. 31, 2025, and included a transition rule that limits the application of Section 951(a)(2)(B). Under the transition rule, certain dividends are not treated as dividends for purposes of Section 951(a)(2)(B), except as provided by the Secretary. The rule applies to dividends that are:

• Paid or deemed paid on or before June 28, 2025, and during the taxable year of a CFC that includes such date, provided the U.S. shareholder did not own directly or indirectly own the stock of the CFC during the portion of the taxable year on or before June 28, 2025, or
• Paid or deemed paid after June 28, 2025, and before a foreign corporation’s first taxable year beginning after Dec. 31, 2025.

Notice 2025-75 provides that an actual or deemed distribution is treated as a dividend for Section 951(a)(2)(B) purposes to the extent that it increases the taxable income of a U.S. person subject to U.S. federal income tax. To rely on this rule, the Section 951(a) inclusion shareholder must attach a statement to Form 5471 specifying the amount of the dividend and explaining why the shareholder is entitled to treat the amount as a dividend for purposes of Section 951(a)(2)(B).

The notice further explains that whether a dividend increases the taxable income of a U.S. person is determined by applying all relevant provisions of the Internal Revenue Code and Treasury regulations before applying the transition rule. The determination is made after taking into account exclusions or deductions that are specific to dividends and that reduce or eliminate the dividend’s inclusion in taxable income (for example, the Section 245A dividends received deduction). However, the determination is made without regard to generally applicable deductions that are not specific to the receipt of a dividend (such as depreciation deductions under Section 167).

In a tiered CFC structure, a dividend is treated as increasing the taxable income of a U.S. person to the extent that the dividend is taken into account in determining a U.S. shareholder’s inclusion under Section 951(a)(1)(A) or Section 951A(a).

The notice also applies special look-through rules for partnerships and S corporations, under which the determination of whether a dividend increases taxable income is made at the partner or shareholder level.

Taxpayers should identify dividends subject to the transition rule and determine whether each dividend increased the taxable income of a U.S. person. Where applicable, the U.S. shareholder that acquired the CFC stock should ensure proper documentation, including the required disclosure with Form 5471.

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