The Repeal and Reinstatement of Section 958(b)(4): A Tale in Two Parts

The Evolution of the US CFC Downward Attribution Rules

If the story of the US controlled foreign corporation (CFC) rules were written as a novel, the tale of downward attribution would make for an absorbing chapter on legislative intention, bureaucratic overreach and regulatory redemption.

On 07 July 2025, the One Big Beautiful Bill Act (OBBBA) was signed into law. One of the provisions included in the OBBBA effectively unwound a previous amendment to reinstate Section 958(b)(4), a Code section that the same Administration repealed during the first Trump term back in 2018 as part of the Tax Cuts & Jobs Act (TCJA).

Pre-TCJA, the rules were simple (in the language of tax, at least) – only direct, indirect or constructive ownership by US persons “counted” towards the crucial 50% US ownership threshold that determined whether a foreign corporation would be treated as a CFC for US tax purposes.  Section 958(b)(4) acted as a roadblock by preventing reattribution of ownership from foreign corporations to their US subsidiaries.

In Figure 1, pre-TCJA, Foreign Parent and Foreign Subsidiary would not be treated as CFCs if US Citizen was the only direct or indirect US shareholder. This result made sense as US Citizen did not control Foreign Parent if US Citizen only owned 10% by vote and value.

Part 1 – The repeal of Section 958(b)(4)

Purportedly seeking to curb perceived abuse by multinational groups engaging in de-CFC-ing transactions, the TCJA, with the surgical precision of a sledgehammer, repealed Section 958(b)(4), opening the floodgates to downward attribution. Effective 01 January 2017, US subsidiaries found themselves treated as owners of their foreign brothers and sisters, resulting in a plague of “constructive CFCs.” Following the repeal of Section 958(b)(4), in Figure 1, US Inc is deemed to own all the shares owned by its parent. As a result, US Inc is deemed to own 100% of the shares of Foreign Subsidiary thereby causing Foreign Subsidiary to be treated as a CFC for US tax purposes.

The knock-on effect was two-fold, firstly, US Inc was required to report all constructively owned CFCs on Form 5471 annually. Although the reporting was informational only and US Inc was not subject to US tax under the CFC regimes, the reporting was burdensome and often resulted in a drag on corporate resources to timely provide all necessary information to their US tax compliance provider. The cost of compliance can quickly add up, but the downside to not filing is a potential $10,000 per year, per CFC IRS penalty. Failure to comply continues to regularly be flagged as part of diligence exercises during – e.g., equity raises, exit events, etc. – potentially resulting in a chip on the purchase price or even complete deal failure.

US Citizen had to not only annually file a Form 5471 to report each CFC (as a 10%+ US person shareholder) but was also potentially subject to US tax currently on the underlying CFC income under the CFC regimes. These regimes can trigger dry tax charges to direct and indirect US shareholders.

Minority US investors found themselves in a quagmire of US reporting once reserved for those actually pulling the strings, with the rule entangling those with little to no economic control. Not only was this administratively burdensome (and arguably unfair), but compliance became Kafkaesque, with minority US shareholders often struggling to get the information necessary to fulfil their newly assigned Form 5471 obligations.

The tax community, including accountancy firms, industry groups and even the US Treasury viewed the chaos with a mixture of concern and frustration. The American Institute of CPAs pleaded for relief, pointing out that legislative intent (as included in the TCJA Conference Report) was not meant to ensnare so many unintended CFCs or create income inclusions for those with no real ownership control.

Part 2 – Restoration with strings attached

Enter the OBBBA – Section 958(b)(4) is back, once again drawing a line against foreign-to-US downward attribution for CFC status. The welcome effect is that US subsidiaries of foreign groups will generally not be treated as constructive owners of their siblings, and the era of accidental CFCs fades into the sunset for CFC tax years beginning after 31 December 2025.

But Congress is no longer naive to “de-control” shenanigans – the original perceived abuse the TCJA sought to curtail. The OBBBA introduced Section 951B that carves out a new regime for so-called “foreign controlled US shareholders” (FCUS) and “foreign controlled foreign corporations” (FCFC). In essence, only US persons collectively possessing true majority control (over 50%, as if downward attribution still applied) over a foreign corporation are subject to CFC reporting and potential taxation under the CFC regimes.

This comes as a welcome change for taxpayers similar to Figure 1 who won’t be caught by Section 951B and will instead be free from the annual reporting burden and potential taxation under the CFC regimes beginning in 2026.

The tale of downward attribution is one of ambition, overreach and hard-won relief. US tax, in its endless war to curb perceived avoidance, has rediscovered both its compass and sensibility by restoring Section 958(b)(4), albeit with some strings attached.