Background
On December 4, 2025, Treasury and the IRS published Notice 2025-77 (the Notice), announcing their intent to issue proposed regulations regarding Section 960(d)(4), as enacted under the One Big Beautiful Bill Act (OB3).
Section 901(a) allows taxpayers to claim a credit for eligible foreign income taxes paid or accrued, including certain deemed-paid taxes for domestic corporations under §960. §960(d) states that when a domestic corporation includes an amount in gross income under §951A, it is treated as having paid related foreign income taxes.
Prior to OB3, §960(d)(1) provided a 20% haircut to all tested income taxes generated through the global intangible low-taxed income (GILTI) computation, meaning taxpayers were only able to claim a foreign tax credit (FTC) equal to 80% of the foreign taxes paid associated with tested income. OB3 reduced the 20% haircut to a 10% haircut, effectively allowing for 90% of foreign income taxes paid pursuant to net CFC tested income (NCTI) – formerly, GILTI, to be subject to FTCs.
Forvis Mazars Insight: The adjustment from 20% to 10% represents a beneficial outcome for taxpayers and is effective for taxable years beginning after December 31, 2025.
Effective Date Confusion
The notice confirms there was confusion on when to apply the effective date of June 28, 2025 (the Effective Date), based on a company’s tax year and the forthcoming proposed regulations under §960(d)(4) will provide guidance on application of the Effective Date.
- 960(d)(4) denies a foreign tax credit for 10% of foreign income taxes paid or accrued with respect to any amount excluded from gross income under §959(a) via §951A inclusions for a U.S. shareholder’s tax year ending after the Effective Date.
If a U.S. shareholder has a §951A inclusion in its taxable year ending on or before the Effective Date, then §960(d)(4) will not apply to foreign income taxes paid or accrued with respect to any amount that is excluded from gross income under §959(a) by reason of that inclusion, even if those foreign income taxes are paid or accrued (or deemed paid under §960(b)(1)) after the Effective Date.
2024 Proposed PTEP Regulations
Section 959(a) excludes a controlled foreign corporation’s (CFC) earnings and profits from the gross income of a U.S. shareholder if that amount has already been included from a §951A inclusion. To determine this amount, §1.960-3 requires the tracking of a CFC’s previously taxed earnings and profits (PTEP) and foreign income taxes attributable to PTEP. Proposed amendments to the above regulations were published on December 2, 2024 (the 2024 proposed PTEP Regulations).
According to the notice, the forthcoming proposed regulations will also modify the 2024 proposed PTEP regulations.
The “§951A PTEP” group set forth in §1.960-3(c)(2)(viii) will be expanded to include two groups: (1) pre- June 29, 2025, §951A PTEP (2) post- June 28, 2025, §951A PTEP.
The pre- June 29, 2025, §951A PTEP is PTEP resulting from §951A inclusions in a taxable year of a U.S. shareholder ending on or before the Effective Date and the post- June 28, 2025, §951A PTEP is PTEP resulting from §951A inclusions after the Effective Date.
Should a taxpayer have a §959(a) distribution of post- June 28, 2025 §951A PTEP, no FTC will be allowed for 10% of any foreign income taxes paid or accrued, whereas, if the distribution is of pre- June 29, 2025 §951A PTEP no reduction is required for the FTC for of any foreign income taxes paid or accrued with respect to such distribution.
Forvis Mazars Insight: An U.S. shareholder will now have to split its §951A PTEP into two groups. This change should be beneficial to taxpayers since the determination is based on the Effective Date and not the date of the distribution. This could impact the FTCs on distributions made during the 2025 calendar year. This calculation could be complicated further by the change in the one-month deferral rule, if applicable, under §898.
How Forvis Mazars Can Help
Taxpayers may rely on the rules of this notice until the proposed regulations are published, provided that they are applied in their entirety and consistently.
Our international tax team members can help you in applying these legislative changes to your income tax situation, please contact one of our trusted professionals.