New CFC Rules for 2026: Section 958(b)(4) Restoration and the Foreign Controlled Corporation Provisions
Please note, due to changes in the bill, deletions are shown in strikethrough, and substitutions are shown in bold.
Introduction
The One Big Beautiful Bill Act, signed on Jul. 4, 2025, includes changes that apply to controlled foreign corporations and their US shareholders. Two of those changes affect whether a US taxpayer has a Form 5471 filing requirement and an income inclusion for a foreign corporation’s subpart F income or net Controlled Foreign Corporations (CFC) tested income—the new name for global intangible low-taxed income. The changes are effective for foreign corporation tax years beginning after Dec. 31, 2025.
- IRC section 958(b)(4) has been restored after being removed in the 2017 Tax Cuts and Jobs Act. Ownership of foreign corporation stock once again excludes stock constructively owned because of the IRC section 318(a)(3) downward attribution rules.
- New IRC section 951B creates definitions for “foreign controlled foreign corporations” and “foreign controlled United States shareholders.” IRC section 951B is designed to create inclusions for subpart F income and net CFC tested income for US taxpayers who fall within those definitions.
Repeal of IRC Section 958(b)(4) (2017)
Before the 2017 Tax Cuts and Jobs Act (TCJA), IRC section 958(b)(4) prevented “downward attribution:” foreign affiliate stock owned by a ForeignParent was not considered owned by its US subsidiaries when applying the controlled foreign corporation (CFC) rules.
TCJA repealed section 958(b)(4) outright, turning the downward-attribution switch to “on.” Overnight, many US corporations became constructive 10 percent shareholders of foreign “brother-sister” companies they did not truly control. Thanks to downward attribution, those US corporations owned more than 50 percent of these foreign corporations. This created inadvertent United States shareholders and CFCs. Example 1 shows how this worked.
Example 1. Facts
Let’s apply the CFC stock ownership rules as they existed before the One Big Beautiful Bill’s changes, so you can see the collateral damage caused by the 2017 repeal of IRC section 958(b)(4)—which opened the downward attribution floodgates.
Example 1: United States Shareholder
A United States shareholder is a United States person who owns 10 percent or more of a foreign corporation’s stock (by vote or value). Stock ownership is determined using IRC section 958(a) (for direct and indirect ownership) and IRC section 958(b) (for constructive ownership). IRC section 951(b).
In Example 1, DomesticSub does not directly own ForeignSub stock. IRC section 958(a)(1)(A). Nor does DomesticSub own ForeignSub stock indirectly through foreign entities. IRC section 958(a)(1)(B), (a)(2).
However, DomesticSub constructively owns 100 percent of ForeignSub’s stock because of the downward attribution rules invoked by IRC section 958(b). Use the constructive ownership rules of IRC section 318(a) (with three modifications, only one of which is relevant here) to determine whether a United States person is a United States shareholder. IRC section 958(b). Prior to the One Big Beautiful Bill’s restoration of IRC section 958(b)(4), downward attribution was permitted.
IRC section 318(a)(3)(C) contains the relevant downward attribution rule. IRC section 958(b)(3) modifies IRC section 318(a)(3)(C) to change the threshold ownership condition from 50 percent to 10 percent. As modified by IRC section 958(b)(3), IRC section 318(a)(3)(C) says:
If 50 [10] percent or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation.
Let’s rewrite that using company names to make it easier to understand:
If 10 percent or more in value of the stock in [DomesticSub] is owned, directly or indirectly, by or for [ForeignParent], [DomesticSub] shall be considered as owning the stock owned, directly or indirectly, by or for [ForeignParent].
ForeignParent owns 100 percent of DomesticSub. Therefore, DomesticSub owns 100 percent of whatever stock ForeignParent owns. ForeignParent owns 100 percent of ForeignSub. Therefore, DomesticSub owns 100 percent of 100 percent (which of course equals 100 percent) of ForeignSub stock.
Since DomesticSub owns 100 percent, which is more than the 10 percent threshold required by IRC section 951(b)(3), of ForeignSub, DomesticSub is a United States shareholder of ForeignSub.
Example 1: Constructive CFC
A foreign corporation is a CFC if all United States shareholders own more than 50 percent of its stock, by vote or value. IRC section 957(a). Ownership is determined by applying IRC section 958(a) (direct or indirect stock ownership) and IRC section 958(b) (constructive ownership). IRC section 957(a).
DomesticSub owns 100 percent of ForeignSub stock because IRC section 958(b) applies the IRC section 318(a)(3)(C) downward attribution rules. These rules attribute ForeignParent’s stock to DomesticSub, as demonstrated above.
Since 100 percent of ForeignSub is constructively owned by DomesticSub, ForeignSub is a CFC.
Restoration of IRC Section 958(b)(4) (2025)
The TCJA legislative history shows Congress intended to target “de-control inversion” transactions by repealing IRC section 958(b)(4), not to create thousands of accidental CFCs. The Service attempted a partial fix of the TCJA-created mess with Rev. Proc. 2019-40, but legislation was required for a complete solution to:
Example 1: Different Results After 2025
Applying newly-updated IRC section 958(b) with its prohibition against downward attribution to the structure shown in Example 1, DomesticSub is no longer a United States shareholder of ForeignSub—it owns no ForeignSub stock:
- DomesticSub does not own stock in ForeignSub directly. IRC section 958(a)(1)(A).
- DomesticSub does not own ForeignSub stock indirectly through foreign entities. IRC section 958(a)(1)(B), IRC section 958(a)(2).
- DomesticSub’s constructive ownership of ForeignSub stock is zero percent because the downward attribution rules of IRC section 318(a)(3)(C)—the cause of trouble in the earlier example—no longer applies because of newly-restored IRC section 958(b)(4).
Similarly, ForeignSub is not a CFC. A foreign corporation is a CFC when United States shareholders own more than 50 percent of its stock. ForeignSub’s stock is 100 percent owned by ForeignParent.
Effective Date
The restoration of IRC section 958(b)(4) is effective for foreign corporation tax years starting after Dec. 31, 2025. Pub. L. 119-21 (signed Jul. 4, 2025), section 70353(d).
What to Do Now
Revisit all corporate structures where you currently have United States shareholders and CFCs. Determine stock ownership in light of the “no downward attribution” rules that will apply for foreign corporation tax years starting after Dec. 31, 2025. Compliance requirements may change based on the new stock ownership calculation methodology: taxpayers may cease to be classified as United States shareholders, foreign corporations may cease to be classified as CFCs, or both.
IRC Section 951B: Added
Despite the restoration of IRC section 958(b)(4), we must still wrestle with downward attribution rules.
IRC Section 951B’s Policy Target
New IRC section 951B uses downward attribution rules to define specific types of taxpayers for income inclusion. The targeted structures usually came about by a multi-step transaction known as a “de-control inversion.”
Example 2: De-control Inversion
Start
The starting structure in a de-control inversion is simple: DomesticSub owns 100 percent of the stock of ForeignSub. Subpart F income and net CFC tested income will of course be included in DomesticSub’s gross income.
Step 1. Inversion
How can the income inclusions be prevented or reduced?
Step 1 involves an inversion transaction. The DomesticSub shareholders create a new foreign corporation (ForeignParent) and contribute all of their DomesticSub stock to ForeignParent in exchange for ForeignParent’s stock.
Now, ForeignParent owns 100 percent of the stock of DomesticSub, and DomesticSub owns 100 percent of ForeignSub. DomesticSub still has an income inclusion problem: it owns 100 percent of ForeignSub’s stock directly and constructively (via downward attribution), so has income inclusions to the extent of its direct stock ownership.
(I am ignoring the effect of IRC section 7874—the anti-inversion rules—because these de-control inversions deliberately and successfully planned around the application of IRC section 7874).
Step 2. De-control
Step 2 involves de-control: DomesticSub’s direct stock ownership in ForeignSub is diluted. For example, ForeignParent might contribute cash to ForeignSub in exchange for newly issued ForeignSub stock.
Consider this scenario for the de-control step.
ForeignParent makes a cash capital contribution to the foreign subsidiary and acquires 85 percent of its stock, diluting DomesticSub’s stock ownership in the foreign subsidiary to 15 percent.
Result Prior to IRC Section 951B
The result is a structure that looks like this:
Prior to enactment of IRC section 951B, DomesticSub would be a United States shareholder of ForeignSub, and ForeignSub would be a CFC. DomesticSub, in this example, would have income inclusion of 15 percent of ForeignSub’s subpart F income and net CFC tested income.
How IRC Section 951B Works
Introduction
IRC section 951B creates new, special-purpose types of United States shareholders and controlled foreign corporations. If both special definitions apply, IRC section 951B applies most of subpart F (IRC sections 951 through 965) to cause affected taxpayers to have income inclusions under IRC section 951(a) and IRC section 951A(a)—even if the taxpayer is not a United States shareholder and the foreign corporation is not a controlled foreign corporation according to the standard definitions.
There is a three-step analysis to determine if IRC section 951B applies, and then (if it does), apply IRC section 951B to other parts of the Internal Revenue Code to cause income inclusions.
Step 1. Normal Classification
Like all situations involving United States persons and foreign corporations, the first step is to do the normal analysis:
- Is this United States person a United States shareholder? IRC section 951(b) applies, and downward attribution is prohibited by newly restored IRC section 958(b)(4).
- Is this foreign corporation a CFC? Is more than 50 percent of its stock owned by United States shareholders? IRC section 957 applies.
A “yes” answer to both will result in subpart F income inclusion (IRC section 951(a)) and net CFC tested income inclusion (IRC section 951A(a)).
Step 2. IRC Section 951B Classification
If you did not find United States shareholder and controlled foreign corporation status at Step 1, move on to Step 2 to re-analyze stock ownership using the special rules of IRC section 951B(b) and (c):
- Is this United States person a foreign controlled United States shareholder? IRC section 951B(b)(1) tells you how to figure that out.
- Is this foreign corporation a foreign controlled foreign corporation? IRC section 951(c) tells you how to do this.
A foreign controlled United States shareholder is defined in IRC section 951B(b):
For purposes of this section, the term "foreign controlled United States shareholder" means, with respect to any foreign corporation, any United States person which would be a United States shareholder with respect to such foreign corporation if:
(1) section 951(b) were applied by substituting "more than 50 percent" for "10 percent or more", and
(2) section 958(b) were applied without regard to paragraph (4) thereof.
The job is simple: assume downward attribution applies (the effect of IRC section 951B(b)(2)) and compute stock ownership. If the United States person owns more than 50 percent of the foreign corporation’s stock (IRC section 951B(b)(1)), then you have a foreign controlled United States shareholder.
A foreign controlled foreign corporation is defined at IRC section 951B(c):
For purposes of this section, the term "foreign controlled foreign corporation" means a foreign corporation, other than a controlled foreign corporation, which would be a controlled foreign corporation if section 957(a) were applied:
(1) by substituting "foreign controlled United States shareholders" for "United States shareholders", and
(2) by substituting "section 958(b) (other than paragraph (4) thereof)" for "section 958(b)".
Look at your foreign corporation. First, did you already decide that it is a controlled foreign corporation using the normal IRC section 957(a) rules? If so, stop. The foreign corporation cannot be a foreign controlled foreign corporation. Second, rewrite IRC section 957(a) to incorporate the changes required by IRC section 951B(c)(1), (2):
For purposes of this title, the term “foreign controlled foreign corporation” means any foreign corporation if more than 50 percent of:
1) the total combined voting power of all classes of stock of such corporation entitled to vote, or
2) the total value of the stock of such corporation,
is owned (within the meaning of section 958(a)) or is considered as owned by applying the rules of ownership of section 958(b) (other than paragraph (4) thereof), by United States shareholders foreign controlled United States shareholders on any day during the taxable year of such foreign corporation.
Third, determine whether foreign controlled United States shareholders own more than 50 percent of the foreign corporation’s stock using the stock ownership rules of IRC section 958(a) and (b). When you apply the constructive ownership rules of IRC section 958(b), calculate constructive ownership by including downward attribution (i.e., pretend that IRC section 958(b)(4) does not exist).
Step 3. Income Inclusion by Creative Rewriting
In Step 1, you determined United States shareholder and CFC status. Income inclusions are determined under IRC section 951(a) and IRC section 951A(a) in the usual fashion.
In Step 2, you again determined status—foreign controlled United States shareholder and foreign controlled foreign corporation status.
Here in Step 3, you apply IRC section 951B(a) to cause a foreign controlled United States shareholder of a foreign controlled foreign corporation to have income inclusions under IRC section 951(a) and IRC section 951A(a) as if this were a United States shareholder of a controlled foreign corporation. This is done through creative rewriting of the Internal Revenue Code.
How to Rewrite the Code If IRC Section 951B(a) Applies
If you have determined that you have a foreign controlled United States shareholder of a foreign controlled foreign corporation, IRC section 951B(a) tells you what to do: rewrite almost all of subpart F (IRC sections 951–965) in specific ways.
Do Not Touch the Definition of US Shareholder, CFCs
IRC section 951B(a) does not apply to IRC sections 951(b) and 957. IRC section 951B(a)(1).
The effect of this exclusion is to leave untouched the basic rules for determining whether a US person is a United States shareholder and whether a foreign corporation is a controlled foreign corporation. The Internal Revenue Code already knows how to tax a United States shareholder, so IRC section 951B’s intervention is unnecessary.
Net CFC Tested Income
A foreign controlled United States shareholder of a foreign controlled foreign corporation includes net CFC tested income in that shareholder’s gross income.
IRC section 951B(a)(2) says:
Section 951A (and such other provisions of this subpart as provided by the Secretary) shall be applied with respect to such shareholder:
A) by treating each reference to "United States shareholder" in such section as including a reference to such shareholder, and
B) by treating each reference to "controlled foreign corporation" in such section as including a reference to such foreign controlled foreign corporation.
“Such shareholder” means a foreign controlled United States shareholder of a foreign controlled foreign corporation.
Rewriting IRC section 951A(a) to reflect IRC section 951B(a)(2) (additions shown in bold):
Each person who is a United States shareholder or foreign controlled United States shareholder of any controlled foreign corporation or foreign controlled foreign corporation for any taxable year of such United States shareholder shall include in gross income such shareholder's net CFC tested income for such taxable year.
Thus, IRC section 951B(a) adds a new category of US taxpayers who have net CFC tested income inclusions: foreign controlled United States shareholders of foreign controlled foreign corporations.
Subpart F Income
A foreign controlled United States shareholder of a foreign controlled foreign corporation includes its pro rata share of subpart F income in its gross income by a simple game of word substitution. IRC 951B(a)(1) tells us to do Internal Revenue Code word games by substitution:
a) In the case of any foreign controlled United States shareholder of a foreign controlled foreign corporation --
- this subpart (other than sections 951A, 951(b), and 957) shall be applied with respect to such shareholder (separately from, and in addition to, the application of this subpart without regard to this section)—
A) by substituting "foreign controlled United States shareholder" for "United States shareholder" each place it appears therein, and
B) by substituting "foreign controlled foreign corporation" for "controlled foreign corporation" each place it appears therein.
We must apply IRC section 951B(a)(1) to IRC section 951(a) because it is within “this subpart,” namely Subtitle A, Chapter 1, Subchapter N, Part III, Subpart F of the Internal Revenue Code (IRC sections 951–965), and it is not excluded by the parenthetical statement listing three provisions of subpart F for exclusion.
Applying IRC section 951B(a)(1)’s instructions to rewrite IRC section 951(a)(1)(A), we get:
If a foreign corporation is a controlled foreign corporation foreign controlled foreign corporation at any time during any taxable year, every person who is a United States shareholder (as defined in subsection (b)) foreign controlled United States shareholder of such corporation and who owns (within the meaning of section 958(a)) stock in such corporation on the last day, in such year, on which such corporation is a controlled foreign corporation foreign controlled foreign corporation shall include in his gross income, for his taxable year in which or with which such taxable year of the corporation ends—
(A) his pro rata share (determined under paragraph (2)) of the corporation’s subpart F income for such year[.]
IRC section 951B(a)(1) creates a ghost version of the IRC section 951(a) subpart F income inclusion rule that applies the inclusion to a new category of United States persons: foreign controlled United States shareholder of foreign controlled foreign corporations.
Other Sections in Subpart F
The same rule that we used for subpart F income inclusions (substitute “foreign controlled United States shareholder” for “United States shareholder,” and “foreign controlled foreign corporation” for “controlled foreign corporation”) will apply to all other provisions in subpart F. IRC section 951B(a)(1).
For example, IRC section 952(a) (the definition of subpart F income) will now begin:
For purposes of this subpart, the term “subpart F income” means, in the case of any controlled foreign corporation foreign controlled foreign corporation, the sum of . . . .
Conclusion
For practitioners, here is some homework to do before new tax years start after Dec. 31, 2025:
- Revisit all holding structures and redetermine the status of United States shareholders and controlled foreign corporations. The restoration of IRC section 958(b)(4) might mean fewer Form 5471 filing obligations.
- Look carefully at all holding structures that might be at risk of creating income inclusion for a domestic corporation because of IRC section 951B and consider stock ownership changes to eliminate potential income inclusions on the domestic corporation’s tax return for upcoming years.
Philip D.W. Hodgen is an international tax lawyer in Pasadena, California. Find him at https://hodgen.com or https://internationaltaxlaw.com.