Thus, a foreign partnership does not have any items of taxable income arising from subpart F income of CFCs owned by the foreign partnership.
Under IRC Section 958(a)(2), a partner in a foreign partnership is treated as owning the stock of any CFCs held by the foreign partnership on a proportionate basis. Under this regime, an S corporation determined its subpart F income at the entity level and each S corporation shareholder included in taxable income the shareholder's pro-rata share of the S corporation's subpart F income, regardless of whether the shareholder was a US shareholder with respect to the S corporation's CFCs under IRC Section 951(b). Historically, S corporations were treated as a US shareholder within the meaning of IRC Section 951(b) and thus as entities for purposes of subpart F income inclusions. Finally, IRC Section 1373(a) treats an S corporation as a partnership for purposes of subparts A and F of Part III (IRC Sections 901 through 909 and 951 through 965, respectively) and Part V (IRC Section 999) of subchapter N of the Code. IRC Section 951(b) defines a US shareholder of a foreign corporation as a US person who owns, within the meaning of IRC Section 958(a), or is considered as owning by applying the ownership rules of IRC Section 958(b), at least 10% of the total combined voting power or value of the stock of the foreign corporation. According to IRC Section 951A(a), a US shareholder that owns stock in any controlled foreign corporation (CFC) (as defined in IRC Section 957) for the tax year includes its GILTI amount for that year in gross income.
IRC Section 951A, enacted under the Tax Cuts and Jobs Act (TCJA), introduced the GILTI regime (see Section 14201(a) of Pub. For more detailed information regarding Notice 2019-46, discussed later, see Tax Alert 2019-1557. For more detailed information on the final GILTI regulations, see Tax Alerts 85. This Alert provides an overview of the Notice and related guidance issued to date. Once an electing S corporation ceases to have transition AE&P, the S corporation must apply the aggregate rule of Treas. Electing S corporations must determine a GILTI inclusion at the corporate-level and each shareholder must then include a distributive share of the S corporation's GILTI in taxable income.
Under the Notice, an S corporation with "transition AE&P" as of September 1, 2020, may irrevocably elect entity treatment for purposes of subpart F income and GILTI. The Notice permits electing S corporations to apply its provisions to tax years of S corporations ending on or after June 21, 2019. In Notice 2020-69 (the Notice), Treasury announced its intent to issue regulations addressing the application of subpart F and the global intangible low-tax income (GILTI) regime to certain S corporations with accumulated earnings and profits (AE&P) as of September 1, 2020. Notice 2020-69 provides rules on entity treatment election for certain S corporations for purposes of GILTI in AAA inclusions
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