U.S. Treasury and the Internal Revenue Service (“IRS”) released final and proposed regulations that make important changes with respect to calculating subpart F and passive foreign investment company (“PFIC”) inclusions by U.S. investors that own interests in foreign corporations through domestic partnerships.
Effective for tax years beginning in 2023 for most tax-payers, U.S. partnerships will no longer have subpart F or Code Sec. 956 inclusions, which will occur in at the partner level. At the same time, once newly proposed PFIC regulations are finalized, the controlled foreign corporation (“CFC”) overlap rule will no longer protect small U.S. investors in these partnerships, and more of the PFIC reporting and tax election filing obligations will be shifted to the U.S. investor.
As a result, it is important for U.S. investors and domestic funds to understand these changes and the different effective dates for the various rules.
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Originally published in the March – April 2022 issue of the International Tax Journal.