On September 12, 2024, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) published expansive proposed regulations (Proposed Regulations) on the Corporate Alternative Minimum Tax (CAMT). The Proposed Regulations provide detailed rules on the scope of the CAMT, general rules for the computation of adjusted financial statement income (AFSI), the impact of mergers and acquisitions (M&A), partnership issues, and international tax issues. The Proposed Regulations provide varying applicability dates for specific provisions, including a proposal to apply certain "specified regulations" to tax years ending after September 13, 2024, and complex consistency rules for reliance on the Proposed Regulations. Comments are due December 12, 2024.

We address below key international tax aspects of the Proposed Regulations, including expanded relief to eliminate double counting with respect to dividends from controlled foreign corporations (CFCs), rules for acquisition or disposition of foreign corporation stock, rules for applying the CAMT foreign tax credit (FTC), and the definition of a foreign-parented multinational group (FPMG).

CFC Dividends

The Proposed Regulations broaden the welcome approach set forth in Notice 2024-10 with respect to the double counting of foreign earnings. As discussed previously, Notice 2024-10 provided interim guidance to mitigate the potential for double counting of CFC earnings in the AFSI of a U.S. shareholder that includes its pro rata share of CFC income and also receives dividends from its CFC. Notice 2024-10 provided that certain CFC dividends received by the U.S. shareholder followed regular tax treatment and were thus excludible from a U.S. shareholder's calculation of its AFSI to the extent they qualified for a section 245A deduction or were excluded under section 959 as a distribution of previously taxed earnings and profits (PTEP). Notice 2024-10 also extended this approach to dividends received by a CFC from a lower-tier CFC. The notice however reserved on the treatment of certain deemed dividends, such as section 1248 dividends, as well as dividends from foreign corporations that were not CFCs. 

The Proposed Regulations generally instruct taxpayers to disregard items recorded in a CFC's financial statement income resulting from their direct ownership of stock of a foreign corporation and instead follow the regular tax treatment of such items. As a result, the Proposed Regulations extend the double counting relief provided by Notice 2024-10 to dividends from foreign corporations other than CFCs so long as they qualify for the dividends-received deduction under section 245A. The Proposed Regulations also provide that a deemed dividend under section 1248 resulting from a sale of stock of a foreign corporation likewise follows regular tax treatment. As a result, to the extent the amount is treated as a section 1248 dividend that may be offset by a section 245A deduction, such gain is excludible from AFSI. These aspects of the Proposed Regulations are a welcome simplification and expansion on the interim guidance previously provided.

AFSI Adjustments for Acquisitions or Dispositions

The Proposed Regulations also provide for AFSI adjustments in the case of acquisitions and dispositions involving foreign corporations. In the case of transactions involving stock of a foreign corporation, the general rule is to disregard items reflected in financial statement and include regular tax items, with certain exceptions. The Proposed Regulations also provide special rules requiring the use of "CAMT basis" for "covered asset transactions," which include certain transfers of an asset to or by a foreign corporation, or certain transfers of foreign stock to or by a domestic corporation. In the case of a purchase of foreign corporation stock with a section 338(g) election, AFSI is adjusted to reflect the regular tax treatment, but CAMT basis is used to determine gain or loss. Finally, as in the case of M&A transactions involving domestic corporations, purchase accounting and push-down accounting are disregarded in the case of acquisitions of foreign corporations.

CFC Adjusted Net Income

For the calculation of CFC adjusted net income or loss, CFC FSI is generally adjusted under the rules for determining AFSI of an applicable corporation under section 56A. The treatment of distributions from lower-tier CFCs follows regular tax treatment: they are excluded from CFC adjusted net income to the extent they are excluded as PTEP or qualify for an exception from subpart F and GILTI. As discussed here, the IRS recent published a chief counsel advice concluding that no section 245A deduction is available for dividends received by a CFC. 

CAMT FTC

The Proposed Regulations to a large extent follow the rules of the FTC for regular tax purposes in applying the CAMT FTC. Section 59(l) provides for a "direct" CAMT FTC for foreign income taxes (within the meaning of section 901) that are paid or accrued by an applicable corporation and taken into account on its AFSI, and an "indirect" CAMT FTC for foreign income taxes paid or accrued by a CFC. The indirect CAMT FTC is limited to 15 percent of the aggregate CFC adjustment to AFSI and excess credits can be carried forward for five years. The direct CAMT FTC is not subject to any limitation under section 59(l) and no carryforward is available.

The Proposed Regulations introduce the concept of an "eligible tax" and limit the availability of the CAMT FTC to eligible taxes. An eligible tax is defined as a foreign income tax other than a foreign income tax for which a credit is disallowed or suspended for regular tax purposes under sections 245A(d) and (e)(3), 901(e) and (f), 907, 908, 909, 965(g), 999, or 6038(c). The preamble states that Treasury and the IRS believe that "the policies underlying these disallowances and suspensions for regular tax purposes apply equally in the context of the CAMT FTC" and, further, that the rule will simplify taxpayer compliance and the IRS's administrative burdens.

Although the Proposed Regulations broadly follow the regular tax system in defining an eligible tax, they generally permit a CAMT FTC for foreign taxes paid by CFCs on all types of CFC income without regard to the limitations of section 960. That is, the Proposed Regulations do not apply the "inclusion percentage" limitation or adopt the 20 percent haircut on deemed paid taxes on global intangible low-taxed income (GILTI) inclusions under section 960(d). Nor do they limit the indirect CAMT FTC to foreign income taxes "properly attributable" to subpart F income (section 960(a)) or tested income (section 960(d)). In this context, the preamble acknowledged that "a CAMT FTC generally should be provided with respect to taxes imposed on the earnings of a CFC regardless of the character of those earnings for regular tax purposes, because all the earnings of the CFC are taken into account for CAMT purposes under section 56A(c)(3)."

Although the approach taken to section 960 is welcome, we question why its technical and policy-based approach was not extended to the various restrictions and limitations that the Proposed Regulations apply in the definition of an eligible tax. For example, under the Proposed Regulations a CAMT FTC is disallowed for withholding taxes on dividends from CFCs that are eligible for a section 245A dividends-received deduction. The reason for disallowing an FTC for such taxes in the regular tax system under section 245A(d) is that the earnings are not subject to U.S. tax. In contrast, in the CAMT, these CFC earnings are included in AFSI and the policy rationale for the disallowance of a foreign tax credit is absent. (See further discussion and analysis in our prior article). 

Foreign-Parented Multinational Group

In the case of a domestic corporation that is a member of an FPMG, section 59(k) provides that the corporation is an applicable corporation if the FPMG exceeds the $1 billion AFSI threshold and if the domestic corporation itself exceeds an AFSI threshold of $100 million. The Proposed Regulations significantly expand the definition of FPMG, which has the potential to broaden the scope of the CAMT. 

The Proposed Regulations define an FPMG as a group of at least two entities, one of which is the corporation, if (1) at least one entity is a domestic corporation and one is a foreign corporation; (2) the entities are included on the same applicable financial statement for the taxable year; and (3) one of the entities is an "FPMG common parent." An FPMG common parent is an entity that owns a controlling interest in another entity and in which no entity holds a controlling interest. The Proposed Regulations provide broad definitions, used solely for the purpose of determining whether an FPMG exists, of key terms, such as "foreign corporation," "domestic corporation," and "controlling interest." 

Under the Proposed Regulations, the terms "foreign corporation" and "domestic corporation" include not only entities that are corporations under general tax and local law principles, but also "deemed corporations." A deemed foreign corporation means a non-corporate entity that is an ultimate parent that either (1) directly or indirectly owns (other than through a domestic corporation) a foreign trade or business or (2) owns an equity interest in a foreign corporation other than through a domestic corporation and directly or indirectly holds a controlling interest in the foreign corporation. A deemed domestic corporation means the U.S. trade or business of a foreign corporation. A deemed domestic corporation is treated as a separate U.S. corporation that is wholly owned by the foreign corporation. By deeming entities or trades or businesses to be foreign and domestic corporations, the Proposed Regulations make it more likely that a domestic corporation owned by a partnership would be considered a member of an FPMG. 

The Proposed Regulations represent a meaningful expansion from the FPMG rules under the statute and prior guidance. If finalized, taxpayers owned in part or in whole by a U.S. or foreign partnership, such as portfolio companies of domestic or foreign investment funds, could be within the scope of the CAMT. Given the complexity of these rules, taxpayers should take care to review their structures to understand both their reporting requirements and the CAMT implications.

For more information, please contact:

Layla J. Asali, lasali@milchev.com, 202-626-5866

Samuel A. Lapin, slapin@milchev.com, 202-626-5807

Caroline R. Reaves, creaves@milchev.com, 202-626-5939

Candice C. James, cjames@milchev.com, 202-626-5810

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