IRS provides guidance on new pro rata share transition rule under OBBBA

Prior to the enactment of the One Big Beautiful Bill Act (OBBBA), U.S. shareholders who owned stock of a controlled foreign corporation (CFC) on the last day of the taxable year picked up any inclusions of subpart F and/or global intangible low-taxed income (GILTI) as calculated on a per share basis. OBBBA changes these pro rata share rules post-2025 to ensure all U.S. shareholders holding stock of a CFC at any point during the foreign corporation’s taxable year picks up their pro rata share of net CFC tested income (NCTI) (fka GILTI) and/or subpart F based on (i) the period of the taxable year the shareholder held the CFC, (ii) the period the U.S. person was a U.S. shareholder and (iii) the period the foreign corporation was a CFC. Any deemed inclusions of income resulting from CFC investments in U.S. property under section 956 will continue to be based on the U.S. shareholder(s) who hold(s) such stock on the last day of the taxable year (retaining the “hot potato” rule for this particular purpose). For more on the OBBBA change to the pro rata share rules, see:

• 2025 Year-end tax considerations for international tax planning
• Revamp and rebrand of the GILTI regime in the One Big Beautiful Bill Act 

Historically, when a U.S. shareholder acquired shares of a CFC during a taxable year, such acquiring shareholder reduces any subpart F and/or GILTI tested income or loss attributable to the acquired shares for dividends paid to the former U.S. shareholder (or any other person) holding those shares during such taxable year. This includes any gains to the former U.S. shareholder on the disposition of shares that is recharacterized as dividend income in its hands to the extent of any previously untaxed earnings and profits (E&P) attributable those shares under section 1248. Any reduction allowed to the acquiring U.S. shareholder for dividends paid during the taxable year to a former shareholder of the acquired shares is subject to a limitation so as to not reduce any inclusion below what would be attributable to the acquiring shareholder based upon the ratable portion of the CFC’s taxable year during which the acquiring U.S. shareholder holds the acquired shares.

Transition rule

Taxpayers that have more recently undergone (or looking to complete before a CFC’s (or CFCs’) first taxable year beginning after Dec. 31, 2025) acquisitions of CFC shares will need to consider whether a transition rule introduced under the OBBBA applies whereby any dividends paid (or deemed paid) to a former shareholder might not be treated as dividends paid (or deemed paid) for purposes of the reduction otherwise allowed the acquiring U.S. shareholder if such dividend does not increase taxable income of a U.S. person that is subject to U.S. taxation. This could result, for example, by reason of a dividends received deduction or other dividend-related income exclusion from U.S. taxable income and/or subpart F. A dividend is subject to the transition rule if the dividend is either: