In furtherance of its efforts to provide guidance related to the implementation of tax law changes that are part of the One Big Beautiful Bill Act of 2025 (OBBBA), on December 4, 2025, the IRS issued Notice 2025-75 (Notice), previewing forthcoming proposed regulations relating to the revisions to the pro rata share rule for allocating subpart F income inclusions in section 951(a)(2), and particularly the transition rule under which certain dividends paid after June 28, 2025 are not taken into account for purposes of reducing a US shareholder’s pro rata share of subpart F income under pre-OBBBA section 951(a)(2)(B).1
The Notice provides helpful guidance on the application of the transition rule but also imposes documentation requirements on taxpayers with dividends potentially subject to the transition rule, which may prove burdensome for some taxpayers.
Background
Under current law, a US shareholder of a controlled foreign corporation (CFC) is required to include in gross income its pro rata share of the CFC’s subpart F income and its global intangible low-taxed income (GILTI) calculated based on its pro rata share of relevant items if the US shareholder owns stock of the CFC on the last day of the CFC’s taxable year on which it is a CFC.2 For this purpose, a US shareholder’s pro rata share generally is the amount that would have been distributed with respect to the stock held by such shareholder in a hypothetical distribution of all of the CFC’s relevant earnings, reduced by a portion of any dividends paid by the corporation to another shareholder with respect to such stock during the CFC’s taxable year. The current law is effective for taxable years of foreign corporations beginning before January 1, 2026.
For taxable years of foreign corporations that begin after December 31, 2025, the OBBBA amended the pro rata share rule. As amended, a US shareholder’s pro rata share of subpart F income and tested income or tested loss taken into account in calculating net CFC tested income (NCTI)3 is based on the portion of income (or loss) attributable to the stock of such CFC during the period of the CFC’s taxable year in which such US shareholder owns such stock as a US shareholder and such CFC is a CFC. The pro rata share is no longer determined solely by reference to stock owned in a CFC as of the last day of the CFC’s taxable year on which it is a CFC.
Pro Rata Share Transition Rule
Although generally applicable for taxable years of foreign corporations that begin after December 31, 2025, the amendment to the pro rata share rule includes a transition rule for dividends paid by a CFC during its taxable year that includes June 28, 2025. Under the transition rule, such a dividend does not reduce a US shareholder’s pro rata share of the CFC’s subpart F income or GILTI tested items (determined under the rules prior to amendment by the OBBBA) if (A) such dividend was paid after June 28, 2025, or was paid before such date and such US shareholder acquired the relevant stock after such date, and (B) such dividend did not increase the taxable income of a United States person that is subject to US federal income tax for the taxable year, by reason of either a dividends received deduction, an exclusion from gross income, or an exclusion from subpart f income.
Thus, a US shareholder that acquired stock of a CFC on or before June 28, 2025, applies former Section 951(a)(2)(B) without modification to determine its pro rata share with respect to such stock. However, a US shareholder that acquires stock of a CFC after June 28, 2025, must apply the transition rule to determine the effect on their pro rata share calculations of any distributions with respect to such stock prior to the acquisition. Unless such US shareholder can demonstrate that the dividend distribution was subject to US federal income taxation in the hands of the recipient, it cannot be taken into account to reduce the US shareholder’s pro rata share amounts.
The Treasury Secretary has the authority under the OBBBA to provide for exclusions from the transition rule.
Impact of the Transition Rule
The Notice indicates the IRS intends to issue proposed regulations implementing the transition rule described above. As a threshold matter, the proposed regulations will provide that “a dividend paid (or deemed paid)” under the transition rule will be interpreted consistent with “distributions received by any other person” as described in section 951(a)(2)(B) as in effect before the OBBBA amendments, which, for example, includes any gain treated as a dividend under section 1248.
In determining whether dividends within the scope of the transition rule result in the increase of taxable income of a United States person (so that they may be considered in calculating the pro rata share of the acquiring US shareholder), the proposed regulations will define United States person by reference to the general definition in section 7701(a)(30), but in the case of pass through entities such as partnerships of S corporations, the rules will look through to the owners of such entities. Relatedly, whether a dividend increases the taxable income of a US person will be determined by reference to the “taxable income” definition in section 63, but special rules will be provided for entities that are subject to tax on a basis other than taxable income under section 63, such as regulated investment companies and real estate investment trusts. As noted above, in determining whether an item is taken into account in taxable income, deductions, such as the section 245A deduction will be taken into account. The proposed regulations will clarify that only deductions that are specifically related to the dividend are taken into account. Generally applicable deductions that might otherwise reduce tax liability are not considered for purposes of applying the transition rule.
In the case of a partial exemption for tax on the dividend, only the portion of the dividend that increases taxable income under section 63 will be taken into account, with the determination being made on a share-by-share basis.
The proposed regulations also will provide rules for taxpayers to demonstrate that a dividend within the scope of the transition rule resulted in taxable income of a United States person. Specifically, the proposed regulations will require the US shareholder to attach a statement to Form 5471 providing the amount of each such dividend and describing why the shareholder is entitled to treat it as a dividend for purposes of section 951(a)(2)(B) and how the shareholder determined such dividend increased taxable income of a United States person.
The transition rule will apply on a share-by-share basis, consistent with section 951(a)(2)(B). Accordingly, if a shareholder owned some shares of a CFC before June 28, 2025 and acquired additional shares after that date, while dividends paid with respect to the shares owned before June 28, 2025 are not relevant for purposes of section 951(a)(2)(B), dividends paid to a prior owner with respect to the shares acquired after that date would be within the scope of the transition rule.
Effective Date and Reliance
The forthcoming proposed regulations would apply to taxable years of CFCs that either (i) include June 28, 2025, or (ii) begin after June 28, 2025, but before January 1, 2026. Taxpayers may rely on the Notice for dividends paid before the proposed regulations are issued, provided taxpayers apply the rules consistently.
1 Unless otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (Code), and all “Treas. Reg. §” references are to the regulations promulgated thereunder by the Department of the Treasury (Treasury Regulations or Regulations) as in effect as of the applicable taxable year or as of the date of this legal alert, as relevant.
2 Sections 951(a)(1)(A), 951A(a).
3 NCTI replaces the GILTI rules for tax years beginning after December 31, 2025.
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