On November 29, 2024, the U.S. Treasury Department and IRS issued proposed regulations to provide comprehensive guidance on treating Previously Taxed Earnings and Profits (PTEP) under IRC Sections 959 and 961. These regulations are a significant development, addressing ambiguities in the tax treatment of PTEP, which are earnings of foreign corporations that have already been included in the income of U.S. shareholders under Subpart F, Global Intangible Low-Taxed Income (GILTI), or Section 956. The proposed rules seek to prevent double taxation, improve compliance, and ensure consistent application across various entities.

The regulations provide a structured framework for key areas such as PTEP distribution ordering rules, stock basis adjustments, and foreign tax credit (FTC) allocations. Under Section 959, a clear hierarchy for PTEP distributions is established, prioritizing Subpart F inclusions, GILTI inclusions, and Section 956 inclusions to ensure taxpayers correctly identify which PTEP pools are accessed and avoid additional taxation. The guidance under Section 961 outlines adjustments to stock basis, including increases for PTEP inclusions and decreases for PTEP distributions, allowing for accurate computation of gains or losses on the disposition of CFC stock.

Additionally, the regulations address FTC allocations and currency translation issues, providing specific methodologies to allocate foreign taxes to PTEP groups and convert foreign currency amounts into U.S. dollars using relevant exchange rates. The transition rules are designed to help taxpayers align existing PTEP accounts with the new framework, particularly for domestic partnerships and S corporations. These provisions ensure a smooth implementation of the rules while addressing the unique challenges of these ownership structures.

The proposed regulations are set to apply to tax years of foreign corporations beginning on or after the date of finalization. However, taxpayers may elect to adopt the rules in their entirety early for prior tax years, provided they apply all provisions consistently. This flexibility allows for proactive alignment with the proposed framework.

For more details, refer to the full text of the proposed regulations in the Federal Register document.