Highlights of Recent Foreign Tax Credit Regs and Partnerships

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The recently proposed and final foreign tax credit regulations issued December 2 of this year provides the following key points relating to partnerships and partners. This is a brief summary only to highlight these changes. Further study is required.

  1. The final regulations finalize what are known as “downstream loans”, which are loans by partners to partnerships. In that case, interest income and interest expense are matched up in the same FTC category which was not the case under prior law.
  2. The proposed regulations would add what are known as “upstream loans”, which are loans by a partnership to a partner. These rules are intended to match up with the treatment of downstream loans.
  3. The rules preserve passive treatment for less than 10 percent limited partners but refuse to define who a “limited partner” is, such as a member of a limited liability company. Passive treatment used to apply to corporate general partners owning less than 10 percent in the partnership. That treatment no longer applies so that both individual and corporate general partners get look through treatment regardless of how much of a partnership they own.
  4. Just like the proposed section 960 regulations, the final regulations under section 960 only deal with domestic partnerships. They generally apply aggregate treatment to U.S. shareholder partners of a domestic partnership similar to the approach in the final GILTI regulations and the proposed subpart F regulations which apply section 958(a) treatment to domestic partnerships with US shareholder partners, treating them as look throughs as is the case for foreign partnerships under section 958(a)(2).
  5. Neither the final regulations or the proposed regulations address the effect of a section 78 deemed dividend held through either a domestic or foreign partnership.
  6. Neither the final regulations or the proposed regulations address the treatment under section 960 of foreign partnerships. This is important because section 958(a)(1) says that the look through rule for foreign entities does not apply for purposes of section 960. Why was this not addressed?
  7. The proposed regulations treat guaranteed payments for the use of capital as interest expense for apportionment purposes and for purposes of treating such a guaranteed payment as income equivalent to interest for subpart F purposes. Presumably, the final regulations for this provision will mirror the treatment of such guaranteed payments under the final regulations under section 163(j).
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