Background

United States shareholders of controlled foreign corporations (“CFCs”) are required to include certain forms of passive income in their taxable income. This is referred to as “subpart F income” by reference to its position in the Internal Revenue Code. Subpart F income is includable as ordinary income. Until the enactment of recent tax reform legislation, if income of a CFC was not subpart F income, the U.S. shareholders did not have to include it when calculating their income for the current year and the tax was effectively deferred. This has changed with the adoption of the Global Intangible Low-Taxed Income (“GILTI”) regime, as part of the Tax Cuts and Jobs Act, which will require non-subpart F income to be taxed currently but at a lower rate than regular income. We will turn to that at the end of this note. Prior to the enactment of the Tax Cuts and Jobs Act, on December 19, 2017, the Treasury and the Internal Revenue Service proposed regulations under sections 446, 988 and 954 (the “Proposed Regulations”) that favorably impact the treatment of foreign currency hedges of the activities of a CFC, some of which we will describe below. READ MORE →