On September 21, 2020, the IRS finalized (with certain modifications) proposed regulations that had been issued last year regarding some of the unintended consequences of the downward attribution rules under Section 958(b). On the same day, the IRS also concurrently issued another set of proposed regulations under Section 958(b).

The 2017 Tax Cuts and Jobs Act repealed Section 958(b)(4), which provided that in applying the downward attribution rules of Section 318(a)(3), stock owned by a foreign person would not be attributed to a U.S. person. This repeal has led to more foreign corporations being classified as controlled foreign corporations (or "CFCs") than would otherwise have been the case. For a summary of the attribution rules under Section 318, see our previous blog post.

The final regulations essentially disregard the application of the downward attribution rules in certain circumstances where Treasury and the IRS have deemed it appropriate to do so. Notably, however, the preamble to the final regulations contains specific discussion of the portfolio interest exemption. Treasury and the IRS seem to be acknowledging the unintended consequences that the downward attribution rules are having in this setting, but are signaling that if there is to be a fix, it must come in the form of a statutory change. Until that fix comes, practitioners will have to continue to rely on the various arguments that have been set forth for combating these issues.

Concurrent with the final regulations, the IRS also issued a second set of proposed regulations addressing the application of the downward attribution rules in certain settings.

This is an area of U.S. international tax law that continues to develop.