IRS Releases Final Regulations on Income from Investments in Certain Foreign Corporations

On March 18, 2019, the Internal Revenue Service and the Treasury Department released final regulations that treat certain income imputed to a regulated investment company (RIC) from an investment in a controlled foreign corporation (CFC) or passive foreign investment company (PFIC) as qualifying income for purposes of Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). 

In order to qualify as a RIC under Subchapter M of the Code, a fund must, among other things, derive at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, gains from the sale of stock, securities or foreign currencies, income from certain publicly traded partnerships and other income derived with respect to the fund’s business of investing in stock, securities or currencies (collectively, Qualifying Income). 

Under certain circumstances, U.S. holders of shares in a CFC or PFIC are required to include in their taxable income certain income of the CFC or PFIC regardless of whether the CFC or PFIC distributes that income (Income Inclusions). 

In 2016, proposed regulations were issued under which Income Inclusions would be treated as Qualifying Income only to the extent that the CFC or PFIC made a distribution out of its earnings and profits. In response to comments received on the proposed regulations, the final regulations eliminate the distribution requirement and provide that (1) Income Inclusions are treated as “dividends” for purposes of the Qualifying Income requirement to the extent that the CFC or PFIC makes a distribution out of its earnings and profits and (2) Income Inclusions derived with respect to a RIC’s business of investing in stock, securities or currencies are “other income” derived with respect to the RIC’s business of investing in stock, securities or currencies. As a result, the final regulations treat Income Inclusions even if not matched by a distribution as Qualifying Income as long as the Income Inclusion was derived with respect to the RIC’s business of investing in stock, securities or currencies. 

Taxpayers may rely on the final regulations for taxable years that begin after September 28, 2016.

The final regulations are available at: https://www.federalregister.gov/d/2019-05130