New US Tax Provision for Foreign-Owned Firms Creates Uncertainty

Corporations should become knowledgable about a new section of the Internal Revenue Code that has introduced a novel concept to the international tax vernacular: the “foreign-controlled foreign corporation,” or FCFC.

Section 951B, created by the 2025 tax law, targets sandwich structures in which foreign-parented US companies have avoided taxation under Subpart F—part of the tax code designed to stop corporations from shifting certain income to low-tax jurisdictions— by keeping subsidiary ownership below 50% of a corporation’s holdings.

Under the new rule, an FCFC is subject to both Subpart F and net CFC-tested income tax, or NCTI (net CFC tested income, which superseded global intangible low-taxed income through last year’s tax law), the US minimum tax on a corporation’s foreign earnings.

However, an FCFC isn’t the same as a CFC. It borrows certain CFC tax characteristics without automatically importing every other tax code provision that references controlled foreign corporations. That distinction is where the uncertainty begins.

Unanswered Questions

The primary concern isn’t Section 951B’s direct application of Subpart F and NCTI. The real risk lies in the ambiguity around how FCFCs will be treated under other tax code provisions that reference CFCs but don’t explicitly address FCFCs.

The biggest question involves the look-through rule under Section 954(c)(6), which exempts payments of passive income between related CFCs from Subpart F taxation. Under the Subpart F rules, when one CFC receives passive income from a related CFC, that income would normally be taxed to the US shareholder as foreign personal holding company income, or FPHCI.

The look-through rule offers an exception, allowing us to ignore the passive character of the payment and instead “look through” to the underlying income of the paying CFC. If that underlying income is active business income, the payment is excluded from FPHCI and isn’t taxed currently. The purpose is to let multinationals move cash between related foreign subsidiaries without triggering a US tax hit simply because the payment takes a passive form.

It’s unclear whether the exemption extends to payments between FCFCs, or from an FCFC to a traditional CFC. If the look-through rule doesn’t apply, that income could face the full 21% corporate tax rate.

For companies with significant intercompany activities involving FCFC-classified entities, the financial exposure may be significant.

The IRS has advised that for some tax code provisions, the remedy may be as simple as substituting “FCFC” for “CFC.” But we advise proceeding cautiously, given that proposed regulations from 2020 that would have denied look-through treatment for payments from a “faux CFC” (created by the repeal of Section 958(b)(4) in 2017) to a “real” CFC. Those regulations were never finalized, but they signal a policy direction that could be carried forward.

Other unresolved areas include Form 5471 filing obligations for FCFCs, the application of previously taxed income rules to FCFC distributions, treatment under Section 163(j) interest expense limitation, interactions with treaty-based positions and foreign tax credit computations, and the high-tax exclusion and exception elections. Each could create unexpected tax consequences if guidance doesn’t confirm favorable treatment.

At this point, companies with intercompany payment flows involving FCFCs should assume, until guidance says otherwise, that there is real risk of additional US tax on those payments. The potential magnitude—an additional 21% on affected income—warrants immediate attention.

Taking Action

The IRS has signaled that Section 951B guidance is a priority, but the timeline remains uncertain. Companies can take several steps now to prepare.

• Map your entity structure. Identify which foreign subsidiaries now fall within the FCFC classification. This requires a detailed look at ownership chains, particularly for entities previously swept into CFC status under the reinstated downward attribution rule.
• Inventory intercompany payment flows. Catalog all royalty, rent, dividend, and other passive income payments involving FCFCs. Quantify the income at risk if look-through doesn’t apply.
• Model the tax impact under both scenarios. Run the numbers with and without look-through. Understanding the difference is critical for budgeting, forecasting, and strategic planning.
• Review compliance readiness. Assess whether your team is prepared to file Form 5471 for entities that may now require it. Identify data gaps and resource needs before filing season.
• Evaluate restructuring opportunities. Consider whether intercompany arrangements can be proactively restructured—modifying licensing arrangements, adjusting dividend policies, or revisiting entity classifications—to mitigate exposure.
• Engage with advisers early. The interaction between Section 951B and the rest of the tax code is technical and fact-specific. Early engagement ensures your company is positioned to act quickly once guidance is issued.

The repeal of Section 958(b)(4) under the 2017 Tax Cuts and Jobs Act was a disruptive moment in the tax world. Section 951B delivers the correction Congress first attempted in 2019 but introduces new complexity that will require Treasury and IRS guidance to resolve.

Companies that begin assessing their exposure now will be in the strongest position to act decisively when that guidance arrives.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Dean Peterson is partner-in-charge of EisnerAmper’s international tax practice.

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