Press Room: Tax Release

August 02, 2018

Treasury Issues Regulations on Transition Tax on Foreign Earnings

Treasury and IRS have issued proposed regulations related to the new mandatory deemed repatriation under Sec. 965 (the Transition Tax). The proposed rules include additional guidance and definitions that are useful for many taxpayers. The regulations would limit potential strategies that may have been contemplated by some taxpayers to avoid or reduce their Transition Tax. For specific information on how this guidance impacts you or your company’s tax position, please contact your Andersen Tax advisor.


New Sec. 965, as introduced by the Tax Cuts and Jobs Act (TCJA), imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. The Transition Tax is imposed on applicable taxpayers whether or not any cash or other property is actually distributed. Foreign earnings held in cash or cash equivalents are taxed at a 15.5% rate and the remaining earnings are taxed at an 8% rate (the effective rates for individuals may be higher). Higher rates may apply in 2018 for certain types of taxpayers. The Transition Tax generally may be paid in installments over an eight-year period. IRS had previously announced, via three Notices issued earlier this year, its intention to provide regulations addressing various issues under Sec. 965.

Proposed Regulations

The proposed regulations largely adopt guidance announced previously in the Notices, provide clarity regarding certain definitions and rules, as well as provide welcomed relief for certain matters. Among other items, the proposed regulations provide rules regarding: adjustments to earnings and profits; basis adjustments; limitations for crediting or deducting certain foreign taxes; the eight-year installment election and acceleration events; and the S corporation shareholder deferral election and acceleration events. Notwithstanding the welcomed clarity and relief for certain issues, the proposed regulations do not address other matters commentators were hoping to see, such as: limitation on the effects of Sec. 958(b)(4) repeal and relief for certain cash pooling arrangements.

The Takeaway

The proposed regulations provide important definitions and guidance for taxpayers in determining their Transition Tax obligations a little more than two months from individual and corporate tax filing deadlines. Any taxpayer affected by the Transition Tax should review the proposed regulations with their tax advisor immediately to determine the effect on their tax position. It is significant to note that IRS recently flagged the Transition Tax as a priority area for compliance and IRS agents will be looking closely at the new Transition Tax when examining 2017 returns.