Close Your Eyes: Additional Thoughts On CFC Downward Attribution

Under the controlled foreign corporation (CFC) rules of the tax code, taxpayers may be subject to adverse tax consequences, including "phantom income" inclusions, if they are 10% United States shareholders in a CFC. Very generally, a CFC is any foreign corporation more than 50% of whose voting power or value is directly, indirectly, or constructively owned by 10% United States shareholders.

The Tax Cuts and Jobs Act expanded constructive ownership to include downward attribution, so that a subsidiary now is deemed to own all of the stock owned by any 50% shareholder. As a result of this expansion, if (for example) a foreign parent owns a U.S. subsidiary and a foreign subsidiary, the U.S. subsidiary is deemed to own all of the stock of the foreign subsidiary, so that the foreign subsidiary is treated as a CFC, which could have adverse tax consequences for any 10% United States shareholders of the parent.