987 / Who is a U.S. Shareholder for purposes of the CFC rules?

For purposes of the CFC rules, a U.S. shareholder is a U.S. person (defined in IRC Section 957(c)) who owns (directly, indirectly, or constructively) (1) 10 percent or more of the total combined voting power of stock entitled to vote or (2) 10 percent or more of the total value of all classes of stock entitled to vote in a foreign corporation.

IRC Section 958(a) provides rules for determining direct and indirect stock ownership of a corporation. Under IRC Section 958(b), the constructive ownership rules of IRC Section 318(a) apply to the extent that the effect is to treat a U.S. person as a U.S. shareholder or a foreign corporation as a CFC.

For tax years ending on or before December 31, 2017, IRC Section 958(b)(4) essentially turned off certain “downward attribution” rules that would have otherwise applied. This prevented a U.S. person from being treated as owning stock that is owned by a non-U.S. person.