On December 4, 2025, the U.S. Department of the Treasury and the IRS published Notice 2025-75 (the notice), announcing their intent to issue proposed regulations regarding the transition rule for treatment of certain dividends received by taxpayers from their foreign subsidiaries.
With the enactment of the One Big Beautiful Bill Act (OB3), a U.S. shareholder’s pro rata share of Subpart F income, and tested income and loss, of a controlled foreign corporation (CFC) is generally the portion of income attributable to any period of the CFC’s taxable year. Before the OB3 takes effect, a U.S. shareholder must consider the transition rule when calculating their share of Subpart F income and tested items.
Under the transition rule, specified dividends are not treated as dividends for purposes of applying Section 951(a)(2)(B) to compute a U.S. shareholder’s pro rata share of Subpart F income, unless the dividend increases the taxable income of such U.S. person.
Section 951(a)(2)(B) is applied in situations where stock of a CFC owned on the last day of the taxable year was acquired by the U.S. shareholder during the course of the CFC’s taxable year.
Insight From Forvis Mazars: The transition rule only needs to be considered if a U.S. shareholder has acquired the stock of a CFC during the 2025 taxable year.
Limitations of the Transition Rule
A dividend falls under the transition rule if it meets either of the following conditions: (i) it is paid or considered paid on or before June 28, 2025—the applicable date—during the CFC’s taxable year that includes this date, as long as the U.S. shareholder did not own any CFC stock before that date; and (ii) it is paid or considered paid after the applicable date but before the foreign corporation’s first taxable year that begins after December 31, 2025.
If a U.S. shareholder acquires stock in the CFC after the applicable date, but the CFC pays or is deemed to pay a dividend before the applicable date, that dividend is subject to the transition rule, as long as it is made during the CFC’s taxable year.
The transition rule limits the amount of a U.S. shareholder’s reduction under §951(a)(2)(B) when ownership of the stock of the CFC is transferred to the U.S. shareholder during the CFC’s taxable year and the CFC is deemed to have paid a dividend that is subject to the transition rule, granted the dividend does not increase the taxable income of a U.S. person subject to federal income tax (U.S. person).
Insight From Forvis Mazars: The transition rule is used to limit any inappropriate dividend inclusions from Subpart F income in tax year 2025 when the U.S. shareholder ownership of a CFC has changed midyear.
Key Terms Defined
Any dividend subject to the transition rule is not treated as a dividend for purposes of applying §951(a)(2)(B) if the dividend does not increase the taxable income of a U.S. person. It must be proved that the dividend increases the taxable income of the U.S. person.
Dividends Paid, or Deemed Paid
The notice dictates that any gain included in the gross income of any person as a dividend under §1248 should be treated as a dividend to which the transition rule may apply.
Increase in Taxable Income of a U.S. Person Subject to Federal Income Tax
A U.S. person means any person defined in §7701(a)(30) except for (i) a domestic partnership, (ii) an S corporation, (iii) a domestic grantor trust, or (iv) a bona fide resident. A U.S. person should also include any nonresident alien individual who elects to be treated as a resident under §6013.
For purposes of the transition rule, “taxable income” is generally defined to mean “taxable income” described in §63, but also means investment company taxable income, real estate investment trust taxable income, and unrelated business taxable income.
The increase in taxable income would be computed after the application of any exclusion that results in the dividend being excluded from gross income or taxable income, or any dividend received deduction (DRD) that reduces the amount of the dividend included in taxable income.
Should the income inclusion be offset by a deduction that is not specific to the receipt of the dividend, it has no effect on the determination of the amount by which the dividend increases the taxable income of the U.S. person.
Likewise, if the dividend does not increase the taxable income of a U.S. person due to the high-tax exception or exclusion found in §954(b)(4), it would not be treated as increasing the taxable income for purposes of applying the transition rule.
Moreover, if only a portion of a dividend subject to the transition rule increases the taxable income of a U.S. person, the portion of the dividend that does not increase the taxable income is not to be treated as a dividend for purposes of applying §951(a)(2)(B).
Should a §951(a) inclusion shareholder reduce their pro rata share of Subpart F income or tested income as a result of application of the transition rule, they must determine and document that the dividend increased their taxable income. This documentation should be in the form of a statement attached to their Form 5471 that includes (i) the amount of the dividend paid by the CFC that is subject to the transition rule but is treated as a dividend for purposes of applying §951(a)(2)(B) and (ii) describes when the §951(a) inclusion shareholder is entitled to treat such amount as a dividend for purposes of §951(a)(2)(B) after application of the transition rule. The statement would also need to document how the taxpayer determined the amount that increased the taxable income of the U.S. person.
Partnership & S-Corporation Look-Through
A look-through rule applies when (i) dividends are paid by a CFC directly to a partnership or S corp and (ii) amounts are includable in the gross income of a S corp under §§951(a)(1)(A) or 951A(a) from dividends paid by lower-tier CFCs to upper-tier CFCs. This look-through rule is applied up the chain, until no longer applicable.
As per the notice, whether a dividend paid by a CFC increases the taxable income of a U.S. person, as described above, is to be made at the partner or shareholder level.
How Forvis Mazars Can Help
Taxpayers may rely on the rules of this notice until the proposed regulations are published, provided they are applied in their entirety and consistently.
Our international tax team members can help you apply these legislative changes to your income tax situation. If you have any questions or need assistance, please contact a professional at Forvis Mazars.