Section 951B – A U.S. Anti-Deferral Regime - 5 Things You Should Know

The One Big Beautiful Bill Act (the “Bill”) signed into law on July 4, 2025, introduced Section 951B -- a separate U.S. anti-deferral regime for certain foreign-controlled structures.

Here are five key things you need to know about this important new provision:

1. New Regime for Foreign-Controlled Structures

The new section extends similar Controlled Foreign Corporation (CFC) inclusion rules, with some modifications, to “foreign-controlled United States shareholders” of “foreign-controlled foreign corporations”, even if these entities do not meet the standard definition of a CFC.

To illustrate an example, we’ve provided a brief (and simplified) definition of the terms below. However, please note that these are complex technical concepts, and working with a strategic tax advisor is essential to determine how the rules apply to your specific structure.

• Foreign-Controlled United States Shareholder (FCUSS) is defined as a U.S. person who:

  
  

  • owns more than 50% of a foreign corporation (by vote or value), taking into account constructive ownership attribution rules from foreign persons, including downward attribution rules through foreign persons.

    • These are likely to include U.S. entities controlled by a foreign parent entity and forming part of a structure in which the foreign corporation qualifies as a foreign-controlled foreign corporation (as defined below).

      
      

• Foreign-Controlled Foreign Corporation (FCFC) is defined as a foreign corporation, other than a CFC, that is in effect majority owned directly by foreign persons, but due to constructive and downward attribution rules, it is constructively owned more than 50% by a FCUSS.

  
  

  • These are likely to include a foreign corporation that is majority-owned by a foreign parent entity and may have a brother-sister relationship with a U.S. subsidiary or affiliate of the same foreign parent entity.

Refer to the illustrative example below to see how these rules may apply:

Pre-Bill Scenario

Prior to the enactment of the Bill, the application of downward attribution rules for stock ownership meant that both Foreign Subsidiary A and Foreign Subsidiary B are likely treated as CFCs. As a result:

• U.S. investor is expected to include in current income its indirect share of Subpart F income and Global Intangible Low-Taxed Income (GILTI) from Foreign Subsidiary A and Foreign Subsidiary B.

  
  

• U.S. Subsidiary is not expected to be subject to Subpart F income or GILTI inclusions from Foreign Subsidiary A due to lack of direct or indirect ownership.

• U.S. Subsidiary is expected to include in current income its share of Subpart F income and GILTI from Foreign Subsidiary B.

  
  

Changes Introduced by the Bill

Under the Bill, the limitations on downward attribution rules have been restored to their pre-TCJA (Tax Cuts and Jobs Act) form.

With this change, in the scenario described above, Foreign Subsidiary A and Foreign Subsidiary B may no longer be classified as traditional CFCs. Consequently,

• U.S. investor may no longer be subject to Subpart F income and GILTI inclusions from Foreign Subsidiary A and Foreign Subsidiary B.

• U.S. Subsidiary may no longer be subject to the CFC income inclusions from Foreign Subsidiary B.

This is a welcome relief for U.S. investors in multinational businesses and private funds with complex cross-border structures.

Section 951B Implications

However, under Section 951B rules, the post-TCJA downward attribution rules are retained in limited circumstances. Specifically, they apply to situations involving a “foreign-controlled United States shareholder” of a “foreign-controlled foreign corporation.”

In the scenario described above:

• U.S. Subsidiary is expected to be a 'foreign-controlled United States Shareholder' (FCUSS)

  
  

• Foreign Subsidiary A and Foreign Subsidiary B are expected to be 'foreign-controlled corporations' (FCFCs).

  
  

Accordingly, U.S. Subsidiary is expected to be subject to income inclusions under the Section 951B regime, but only from Foreign Subsidiary B since it owns a direct interest in Foreign Subsidiary B.

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2. Effective Date

Section 951B is effective for tax years of foreign corporations beginning after December 31, 2025.

This means that the first affected tax years will generally begin on or after January 1, 2026 if on a calendar year.

3. Parallel Compliance and Reporting Regime

U.S. persons who fall under the scope Section 951B are required to comply with a parallel income inclusion regime, similar to the CFC income inclusion rules for traditional CFCs. This includes information reporting (such as on Form 5471) and income inclusion requirements, but with specific modifications to reflect the foreign-controlled context.

Treasury is to issue further guidance and regulations to clarify the detailed compliance obligations and other aspects of this new regime.

Parallel blocks

4. Exceptions and Regulatory Authority

Section 951B contains specific exceptions and grants broad regulatory authority to the Secretary of the Treasury to issue further exceptions, limitations, or special rules through regulations or other guidance, which will be critical for interpreting and applying the new law.

Notably, Section 951A (GILTI, now rebranded Net CFC Tested Income), Section 951(b) (Subpart F), and Section 957 (Controlled Foreign Corporation) are excluded from the parallel regime, although section 951A is reapplied with modifications.

5. Assessing impact on U.S. Shareholders and CFCs

These highlights underscore the importance of understanding and preparing for the new compliance landscape under Section 951B—particularly for multinational groups and private funds with complex cross-border structures.

As Treasury guidance emerges, affected taxpayers should closely monitor developments to continue to assess potential impact and meet the requisite compliance requirements.

Review structure and re-assess reporting obligations

We recommend that businesses and private funds conduct a thorough review of their ownership structures and investor composition. This will help identify:

• Impact on tax attributes and planning

• Changes in reporting obligations due to end of CFC status (e.g. Form 5471)

• Incremental reporting that may be necessary (e.g., PFIC testing and reporting)

• Interim reporting that may still be required during the transition period.

Assess potential impact on income inclusions and reporting

Section 951B functions independently from the standard CFC regime. As a result, exclusions or limitations that might otherwise apply under the traditional rules may not be available under Section 951B—potentially eliminating certain protections that previously deferred income from immediate U.S. taxation.

Additionally, guidance is expected to be issued on the interaction of this new regime with the Passive Foreign Investment Company ("PFIC") regime.

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How We Can Help

We specialize in U.S. international tax planning and reporting for complex ownership structures. We help clients:

• Review ownership and investment structures

• Identify potential application of Section 951B

• Conduct tax planning

• Provide tax reporting and compliance support

Considering the potential impact, we can support you in evaluating business and tax strategies, optimizing planning outcomes, streamlining the transition, as well as meeting your reporting and compliance obligations for this year and beyond.

For more information, contact us. 

Disclaimer

The contents of this insight are intended for general information only. illumina CPA Group, Inc. is not, by means of this communication, rendering professional advice or services. Before making any decisions or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.

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