Everything you need to know about CFCs post the One Big Beautiful Bill

I think before the OBBA came out, many of us were worried, concerned, confused. The Tax Cubs and Jobs Act completely changed the face of tax for basically everybody, every tax professional out there, but even more so for those of us in the international space, especially guilty and downward attribution and all of those items. So when we knew that there was going to be a new rule coming out and we were talking about all these different options about what might be in that rule, there was a lot of intense anxiety almost. I spoke to people that were on the upper ends of their career and they said things to me like, "If the rules change too drastically, I'm retiring. I cannot learn another new regime over again." So I think that we were all sort of really standing in trepidation waiting to see what was going to happen next.

And I'm really happy to say that yes, there are changes and yes, they make a difference and yet the bottom line is slightly different, but it is not what we would've expected. It is something that is more in line with a slight changes to things we already knew, which definitely makes our lives easier as we're going forward. Although again, for planning, you have to keep in mind the changes. So there is something to adjust to, but it's not at all what it was or could be.

As I have a question for all the people that are listening as I'm talking and I'm going through the changes, I want you to think about really how big the changes are and it's just sort of at the end I'll get back to it and just you'll give me thumbs up or something to give me your thoughts on really how large. Everyone keep saying, well, downward attribution, the repeal has been unrepealed and really how large you think these changes are, how impactful you feel these changes are. Because again, in my brain, they're not that impactful. They are, but in small pieces, I'm curious to hear from other people how you feel this is truly going to affect the planning and the day-to-day of the work that we do. So just sort of something to keep in mind as we're listening and going through this. What we're going to do basically today is I'm going to talk about just the big change for CFCs, which was the guilty change, downward attribution, all of that.

And then what we're going to do is have Matt and then Michael go through in depth like, okay, on a corporate tax return, this is how the changes are going to look, this is the form that it would be on and just kind of give us sort of an idea of the practical.

Okay, we hear the law, but what's the practical? So they're going to give us that in depth and then we can talk a little bit about the end of just what we take from this and how we're going to be moving forward with the new rules being the way that they are. The first and most important part to talk about is what the rules have been until now. If we don't understand what the rules have been until now, then it's not possible for us to understand the changes. So first and foremost, and some of this is going back like what's a CFC? It's been a CFC, for however many years it's been a CFC, the Tax Cuts and Jobs Act didn't really change that, but we all know that the Tax Huts and Jobs Act added the guilty and all these other pieces that were and obviously the downward attribution situation, but first and foremost to understand what a CFC is.

So the definition easy, whatever foreign corporation that has at least 10% US shareholders or owners that are US people at least by 10% that collectively own more than 50%. And remember, it's the vote or the value of the corporation on any day during the tax year. So just as an example, just to keep in mind that it's vote or value, I have a client that's a general partner in a fund that's an Israeli limited company. He doesn't really have any interest in the company. I mean, he's the general partner. He's got his maybe like half a percent, he doesn't really have any economic, but he's got all the vote. That also makes it a CFC. So when you're calculating the income inclusions, they might be zero, but keep in mind that it's vote or value. So as soon as you've got at least 50%, if you've got more than 50% of owners that own 10% or more themselves, then you are dealing with the CFC.

When we get to the downward attribution discussion, that's also important to keep that rule in mind that if you were under 50% and then all of a sudden you added this other person, which doesn't really own, but somehow was attributed ownership, all of a sudden puts you over 50% before you didn't have a CFC and now you do. So very, very important distinction to just keep in mind as we're going through the discussion. Pre OBBA, we had subpart F, we had that pretax cuts and jobs act too. The subpart F is our regular anti-deferral.

We don't want you having money growing offshore, appreciating in value, passive income that you're not paying taxes on. So if you're a US person and your foreign corp has passive income or certain related party incomes, you're going to pay taxes on that now instead of waiting until you take out the distributions. We've had that for a while. GILTI came in with the Tax Cuts and Jobs Act and added any just like net income basically made companies pay taxes in the US on the earnings of their subsidiaries. So again, sort of pulling in more, but then to add to that, we had the FEDI, which gave us a little bit of a reduced rate. And so this intangible income guilty also said this intangible income thing. It sort of reduced if you had foreign sourced income, we were able to take a reduction on how much of that was going to be taxable.

And then finally we have BEAT. I'll talk about BEAD a little bit more later. It's not so applicable, but it's just a way to keep a minimum tax on large corporations. So all of that was already in place. You can see again, pre, this is as of the 2025 rates, let's say in GILTI, you can take a 50% to 50 deduction and it had it. So therefore if the tax rate is 21, the corporate tax rate is 21%, you had a 10.5% effective rate. The FDDEIe had a deduction of 37.5%, which gave us, again, if you're doing it thinking about 21%, a 13.125% effective rate beat was at 10% or I think it was going to go up, it went up and down every year. And then the foreign tax credit haircut was if you're going to take a foreign tax credit on the guilty income, you were limited to 80% of the foreign taxes paid.

So that's what's been around. And what we call the break, when we say break even rate, which we're going to see a couple of times around here, it's how much foreign taxes would I've had to pay that would get my US taxes to zero. So it used to be that as long as I paid 13.125% of foreign taxes in my CFC, then I paid zero taxes, US taxes. I had enough foreign tax credits between that and then the deductions, I was good. I just had to report. So you'll see the breakeven rate just going to change a little bit. So that's all just like the pre. So now it gets exciting. What was the post? I know it was already almost a year ago. So we've had time to ... Oh, we have a polling question. This is actually nice. [Poll #2]

So I'm giving you guys about a minute. I don't see any Q&A yet or I would talk about that, but I definitely make sure you answer the question so you can get your CPE and then we'll move on after that.

All rigt guys, another 20 seconds. I think it used to have a timer for me of how long the CPE question was going on for, and it doesn't have a timer anymore. So I have to pretend that I know when a minute of. Not always so easy. It's like 90% of you answered. So I'm going to give 10 more seconds and I'm going to press next. I am actually curious. All right. Okay. So most of you are working in a public accounting firm, which means that we're all in the same field. We're all doing this together, suffering through, having to plan this for our clients. Those of you that are in- house tax or finances probably at one point were in public accounting. So probably get also that looking at the same forms that have now changed over and over again type of thing. But I'm definitely coming with that sort of perspective as we go through this, but obviously it's for everyone and please feel free to put items in the Q&A.

I'm more than happy to go through and talk about questions, but we're going to get to the meat and potatoes of what actually changed. Now, very, very, very important to keep in mind is that these changes are for tax years beginning after December 31, 2025, which means that right now we're still in the old regime. It's next filing here. So it's important that we understand this now for planning opportunities, but it's not for right this minute. It's not on these years, this year's tax return, meaning it's not on the tax returns that we're working on right now. It's going to be on the tax returns we're working on next year and it's going to be the planning that we're doing next year, starting January one, 2026 also a little bit nicer than Tax Cuts and Jobs Act, which I know some things were pushed off a year, but some things were like, oh, three weeks passed from when it came out and now everything's changed.

So we have a little bit more time. It gives us more time to digest and plan and it's really important that we do that planning now and not just get surprised next year when things are different, but to keep in mind for the current tax season that we're working in, I know it's not really tax season for anyone else, but it's still tax season for me or it's always tax season for me, but the current time period that we're working, the current tax returns that we're working on right now, these laws do not aply to them. The new rules are going to be going on next year's tax return. So the biggest change in my opinion that really affects us is that we can no longer make jokes that the IRS thinks we're guilty and that's why they're charging us guilty.

Nobody else thinks that's funny. So guilty was renamed to net CFC tested income. It's not nearly as fun and CTI. So before we had global intangible, low tax income, you're going to see throughout that intangible piece sort of just like went to the garbage with OBBA. They're like, " Then intangible, we tried. It didn't really make sense. "And I think with guilty, originally everybody was saying," Oh, the point of guilty was to tax only the intangible income that was offshore, which is why we would take this deduction of, which I'll talk about in a minute, but we would like to take a deduction based on our assets. Assets were tangible and then we kind of all really saw that that wasn't really that impactful and it just guilty really was just taxing pretty much the net income of the company. I think at now the laws are more in line with how we've all been looking at it.

I found it like, okay, good. You just admitted that it wasn't really working and you took it out. "Nice, you made a little correction, but I always used to joke around with the name, the IRS thinks that anybody that lives offshore or does business offshore is guilty, so they named it guilty and then making us pay taxes because we're like guilty of leaving the US or something along those lines. So that's not there for me anymore to like say or the clients when you tell them you have to pay guilty, they're like draw drops. "Guilty? What am I guilty of? " That's gone now it's very boring. You see again, I think it's funny. I smile when I talk about CFCs, sorry, but yeah, so it's called net CFC tested income. Why is it called net CFC tested income? Well, the biggest change is that we no longer are able to deduct this, what they call feeder, which is this 10% of the tangible assets.

So it used to be that we would take our net income and then we would take our tangible assets and would say take 10% of that. So if my net income was 100, and I had tangible assets of 200, I was able to deduct 20 from my 100 to become whatever my tested income is going to be. So now it's just net CFC tested income, there's no more carve out, probably maybe easier for us to calculate, but that piece has definitely been taken out, which again, anytime you had a deduction that now you don't have anymore, it's going to make the taxes a little bit higher because you have a higher level of income. So we don't do that deduction anymore. Our name changes. Now the 250 deduction. So in the past we used to have when you calculate GILTI or when you calculate net CFC tested income, you'd get to the calculation and then you'd say, "Okay, at least on our corporate side, okay, now I'm getting my 250 deduction.

How much is my 250 deduction?" It used to be 50%. So however much my tested income was 50% of it off the top, I wasn't really paying taxes on. Now it went from 50% to 40%. So that's really probably the biggest and most impactful change, meaning that it now is we have less of a 250 deduction. And so you can see the effective US tax rate went up from 10 and a half to 12.6. Again, those are not huge numbers, but any percentage makes a difference. But on the flip side, the foreign tax haircut credit was reduced. So in the past, again, we always, we would say, okay, we could only take 80% of our foreign taxes that we paid. Now we're saying, "Nope, we can take 90 instead of 80." So it's like that 10% flipped, if that makes sense. Again, from a planning perspective with that flip, we might think about, especially if we're our client or whoever is controlling two companies and there's transfer pricing or other things going back and forth, it's now we can use more tax credits than we could before, but our income doesn't get as reduced as much.

We might think about how to increase our foreign tax credits or how to ... Again, there's definitely planning that can be done there probably by some smart lawyer who then is going to need help actually putting it down to paper with numbers, but there's definitely planning that can be done in that area, but it's just, again, they're not huge amounts. In that same planning was that when it comes to calculating the guilty that the interest and the research and experiment costs were taken out of the NCTI baskets. Remember that when we're doing a foreign tax credit, or what was known as guilty, NCTI is in its own basket of types of income. It's not passive, it's not general, it was like its own basket. So the interest and the research and experiment was taken out of that. And then basically the bottom line of this is that, again, I talked to you guys about the breakeven rate before.

So it used to be as long as we had paid 13.125% of your taxes of taxes in a foreign country, you had 0% taxes that you actually paid in the US. Once you put it in the foreign tax credit and you put in the 250 deduction and all of those sort of things, that's increased to 14%, not a huge increase, but everything's relative. So if you're looking at $500 million, that 0.9% increase could make a difference. So there was like a slight raise in how much taxes have to be paid in order for there not to be US taxes. And you can see the changes on this side. They're all, again, everything feels very subtle. That's at least how I'm looking at it. Everything feels very subtle. So there's things that changed. We have to get kind of used to the things that changed, but it has a sort of subtle, I don't know, it has a little bit of a more subtle feel to it after tax cuts and jobs, like I said, we're all like, "Oh my God, how are we going to do this?

Everything's different." So this, I feel like, okay, I got this, this makes sense. It's not everything's different. It's just like slight changes. And you can see these more. I think settle's the right word. You can see these subtle changes over here, some for the positive, some for the negative, but yes, ultimately bringing up the taxes a little bit.

I think we've got another polling question. [Poll # 3] If anybody has any questions, I'd love to discuss it. So now's the time to take it in the Q&A. And yes, I was at a conference yesterday and yes, somebody was asking me about PFIX and yes, I said, "I'd love talking about this. I'm happy to talk about this even if it doesn't bring me any business." I know I'm a nerd, but if you have questions, I'd love to talk about them because I actually like talking about CFCs and PFICS.

Yes, roll your eyes, Matt. I see that. All right. I'm going to give you guys another 10 seconds to answer the question. All right, it has become 40%. Good job. It went down from 50% to 40%. So again, that was like one of the big changes when it went from GILTI to NCTI. All right, more changes. I'm going to talk about BEAT for literally 10 seconds, mainly because I assume that for most people it wasn't so applicable, but I would love to see from maybe show of hands with the emojis or whatever if BEAT was something that you do see with your clients or with the company that you work for. Anyone? If anyone wanted to send me an emoji, I think that there's a way for you to do it.

I would love to know if BEAT's applicable. I'll talk about it for a minute because it's important for us to understand things, but I just would love to hear if it's ... I know I personally haven't dealt with BEAT really. There's the minimum I think for BEAT is 500 million gross receipts, so it's like a very big number. So it's really targeted for large corporations. The whole point was to put a minimum tax on large corporations and they call it this, I love what they call this, like the base stripping or whatever. The basis stripping. Basically the idea was that if your corporations, you get very smart, you have subsidiaries all over the place and you take loans and you pay interest and this and that, and then your earnings go down because you have these payments, related party payments like interest going to other jurisdictions and then your taxable income is lower and so your tax is lower.

So they said, "Nope, we're going to give a minimum tax to all these large corporations." And I think they have to have more than 3% of their expenses have to be from these certain related party payments and then they're subject to this B minimum tax. So in 2025, the rate was 10%, it was scheduled to increase to 12.5% for 2026, but what OBBA did, which was actually very good for planning purposes was to note we're giving it a permanent 10.5% rate. So the biggest takeaway, again, I didn't get one emoji from this group that someone actually works on B. I just find interesting, but the biggest takeaway of this is when you're planning with your clients or whatever and if BEAT is applicable to you, you got a permanent rate now. So it's not like you have to worry each year what's the rate going to be or I don't know, you can actually do better planning with a permanent rate.

Otherwise, it pretty much stayed the same. Again, it didn't seem like someone said in the Q&A that they've seen BEAT.

Okay. Awesome. So one person in this group has seen BEAT, which I think is really cool actually. Again, I'm in a big company and I see very big numbers, but to be in the right amount of gross income and the right amount of these certain payments, the right percentages is maybe less frequent. So again, I'm really actually happy that someone has dealt with it because I always feel like we talk about it, but we don't see it so much. So thank you for letting me know. Yeah. Awesome. Okay. Now onto FDDEI which is something that we're going to see a little bit more and because I'm ridiculous, I'm going to tell you a story first again with the name changes. So earlier this year I was double booked in the US for, we had like a manager tax training and we also had what we call new partner training.

And so I was with two other new partners and we were running from point A to point B very quickly and it was like late at night and we were talking in the car, it was me and another female partner who happens to also be a mother of multiple children and then the male partner wife was expecting their first child and he was asking us about paternity leave and all this stuff and somehow we ended up naming his baby FDDEI and FDDEI was a baby girl and she was born in April and she's very cute, but FDDEI doesn't exist anymore either. So the names change again with the name changes. I think maybe one of the parts that's more complicated than anything else in this is that when names change, it's confusing. We were used to calling it guilty and now we're going to have to get used to calling it NCTI.

We can do it, but you have to kind of remind yourself. So again, FDDEIe also technically the name changed the same thing with Guilty. It was some sort of intangible something that they kept in mind and they said, "Okay, we're taking out that intangible piece." So we're actually making the calculation more simple, nice for us, but again, it means that the numbers that we're dealing with are going to be different and so not necessarily nice for the taxpayer, but it used to be that we'll look at it in the next page, but it used to be that the income was reduced by the QBI and now it's not. And a couple of other changes was ... Okay, the ultimate change with FDDEI, so it's called now instead of like this foreign derived and tangible income, it's called foreign derived, I think I have it on the next page, deduction eligible income.

So it's what income is eligible for the deduction. So the calculation changed to take out that QBI portion because it's not really about intangibles anymore. The actual deduction amount, like the percentage of the amount that you can deduct went down. So it went from 37.5% to 33.34%. I have no idea where the 33.34, like 37 and a half, I can hear where that percentage came from. I don't know where the 33.34%. When you put all the changes together, the effective tax rate actually goes up. So the point here is that we were at 13.125% and now we're at 14%. Now, if you remember from our net tests, whatever it is, the NCTI, we also went from 13.125% to 14%. Interesting. So FEDI is a deduction on the corporate side, which Matt will go into also that's you would almost, that's like foreign income on the corporate level.

So you'd almost say like, let's say you have a branch or a disregarded entity outside of the US, so that would be foreign derived deduction eligible income, whereas GILTI is if you have a subsidiary. So I think the idea is that you've gotten both to an effective tax rate of 14%. Am I right, Matt? Does that sound about right?

Yeah. So I think they stayed in line They were at 13.125%, now they're at 14%. They were looking at QBI and being more of an intangible income focus and they've changed to just more of a regular income focus without QBI and they've kind of stayed in line with one another, including changing their name because they're both at that same purpose of either subsidiaries or branches, et cetera, or how are we taxing them outside of the US? One second. And then I wanted to go into FDDEI a little bit more because I do think that this is something that we see every day. When I was trying to explain the changes to my brain, I needed to see it with numbers. And so I put it together for you a little bit more with details and with numbers. So it used to be that we would have our deduction eligible income.

We would take out our 10% QBI and whatever we have as our remainder would be the deemed intangible income. And then whatever part of the deemed intangible income was allocable to the foreign income, we'd multiply by that to get to however much is allocable to the foreign income. And then 37.5% would be our QBI deduction. So if you look at the numbers down below in the old Feedy sections, if you had $100 and you had QB of $200, so you were left with deemed intangible income of $80, if 50% of that income was foreign. So you had $40 of foreign derived intangible income, of which you could take a 37.5% deduction that you're not going to pay taxes on or 15%, which means that you're paying ... Or $15, excuse me, which means you're paying taxes on $25 of it. At the corporate tax rate of 21%, you've got $5 of corporate tax, 13% effective tax rate, which is the five over the 40.

Now, if we look at the new ones, we don't have any more QBI carve out. So we're just going to look at what's our deduction eligible income, $100. We don't have a Q by carve out. We're starting our eligible base sort of is $100. If we're going to say 50% of that was foreign. So now we're at the foreign derived deduction eligible income of 50 versus the FDDEI 40. Our percentage went down low. So instead of 37.5%, we're at 33.34%. Because the number's higher, the deduction's bigger. So when you first look at it, you're like, wait a minute, I thought you said that the tax rates went up. Remember, the deduction's bigger, but the base number's bigger too. So our amount net of deductions is $33 instead of $25. And then at the 21% corporate tax rate, we've got $7 of taxes. You can see again that the taxes did go up.

We've got the effective tax rate now becomes 14. So again, everywhere we've gone, we've switched from 13.1 to 14. Now this is a little bit of a very bit ... This is extremely simplified calculation for FDDEIe. I personally, like I said, I needed to see the numbers to really understand the impact. So I wanted to show you the numbers as well, but keeping in mind that this is extremely simplified. And one of the pieces of this that's so simplified is that the items that were excluded from deduction eligible income actually changed. So we had the first six separate F, GILTI, whatever that was, foreign brand income, whatever those items were that were already being taken out of the DEI, those stayed the same and then we added a couple more. So usually that DEI number's not even going to be the same. The calculation of how you get to it is going to be a little bit different because it's going to be a little bit different, you're going to be in a situation where even more so the calculations aren't going to be exactly and that's just something to keep in mind, but I wanted to just show simple numbers so we can understand the concepts.

Again, like I said, the second change with FEDI becoming FDEI foreign derived ... I don't know how we ... We're not going to call it Fed DEI. I don't know. I'm not quite sure what we're calling it or we're saying the letters have no idea. Maybe somebody knows more than me, but the big two changes is A, we don't have that QBI carve out anymore. And then B, we have more items that we're excluding from the base before we even start looking at the base, which again changes how we do things. So with that, there's a few other, that's pretty much it with the CFCs. There's a few other things that changed that are ... Part of it we're going to talk about in a few minutes, which is the whole downward attribution. Downward attribution's gone, but then it's really back in 951B. We're going to talk about that in a minute.

There is the CFC look through rules. So those were just continually being extended and they were made permanent. The look through rules are not the same thing as the same country exception, which I believe was already permanent, but just keep that in mind. They do. But that being made permanent is great because there are places where we're able to exclude certain types of income and also just from a planning perspective, we're not sitting there going, "Oh, if this still exists next year." And then also we had this any day rule. So it used to be that when we were looking specifically at GILTI, it was like, who owned it at the last day of the year and now it's any day that you owned it, you'd have to calculate guilty for that. I believe Michael's going to walk us through that a little bit. And then there was one more that's not here.

It's not such a big thing necessarily, but are certain corporations that are required to have the same tax year as, or at least we're required to file as if we have the same tax year as the original taxpayer. And so there was entities that were eligible to make this one month election to have it be one month so you could end a month earlier instead of the exact same end of the tax year. So now that's gone. So you're not supposed to end a month earlier. If you're required to have the CFC have the same tax year as the parent company, then the CFC has to have the same tax year. They can't end a month early. Now I have a really interesting, again, I want to hear from you in the Q&A or with emojis or whatever. I'd love to hear from you.

Maybe it's specifically Israel focused, we don't necessarily have a situation where so frequently we don't have the right tax year. If we were in the UK, if we were in Australia, we would always have subsidiaries because they have different, like their tax year, their legal rules in their tax year are different. So you're going to see that March or whatever it is, April 1st. It's not that it doesn't exist in Israel, that there's entities or not that we don't ever encounter it, but it's less frequent. That being said, I'm curious if there are people here, and again, I'd love to hear from you in the Q&A. I'm more just like as we're sitting in a group of a lot of different practitioners, it's always interesting to kind of discuss how other people handle this. But when you do have, let's say like a UK entity as a subsidiary, are you taking pieces of the financial statements and matching them together so that it has that 12 / 31 year end to match your taxpayer or whatever your taxpayer's year end is?

Are you just doing the best you can with and using the financials one year after the next? Again, the practical thing is to say we're taking audited financial statements and whatever we've got and next year we're just going to take it again. And ultimately it's just a timing difference, but like the actual law is that it has to have the same year. And again, love to hear from anybody has thoughts on that in the Q&A.

And then we have another polling question. I think I'm going through this too fast. I'm trying to slow down. Sorry. Okay. Poll number four. [Poll #4]

Some of these are very creative. I like them. That would be interesting. All right, I did get one message that says that they are restating financial statements that are required. It's definitely correct to restate the financial statements to match the year end. It's just not always so simple. So it's good to know that there's other people making themselves crazy.

Also, while we're answering this, I think somebody before had said that in Israel, where again, a lot of us sitting here on this call, but not everybody, are practitioners in Israel. So they were saying that in Israel, usually companies have taxes that are higher than the high tax exemption amount, which is the 90% of the 21% or about like 18.9 or like 19%. So most of the time a lot of our clients here in Israel don't even have a guilty inclusion, which is true, which when the Tax Cuts and Jobs Act first came out, we didn't know that the high tax exemption was going to go for guilty as well as subpar F or certain types of subpart F, but that is true and that has definitely been a helpful thing and that still exists. That didn't change. What does change is that, and again, this in Israel happens a lot, is that when they have carryover losses, they don't pay taxes in Israel on those carryover losses.

So I've seen this many, many times. You have a company that has carryover losses as such as not paying taxes in Israel and then all of a sudden, the shareholders are paying nice taxes with no foreign tax credits even available on the US side simply because they had carryover losses and you can't use carryover losses for NCTI or guilty. That was that. And then let's see, I should really move on to the next one. I see another ... All right. Yeah. We're moving on. Okay. So yes, the second answer was right that both the seller and the buyer are now going to look at their proportionate share of the NTTI based on the days that they own the stock. So there's no more like, "Oh, I sold it before your end. I don't have to worry about what my NCETI conclusion's going to be. It's gone." So yeah, I mean, that's actually a pretty large change.

So again, that's going to be an interesting and that's definitely impactful. So some of this is impactful. See, I'm still trying to figure out how impactful all of this is. Some of this is very impactful. That is impactful and that's definitely also a planning thing. If before you thought like, "Wait, I don't own it at year end. That's it. I'm good." Now maybe I'm not so good. So that's going to make a difference to what I'm seeing on my tax returns or how much taxes I'm paying. It's not just that the rates went up, it's also who or what.

So if we just kind of looked at this as a summary, you can see that mostly we have rates that are going up. So again, if you're like, just let's think about GILTI and NCTI and everything that has to do with CFCs aside from downward attribution for a second, which we're going to look at in a few minutes, that's also on that chart. We see again that like, okay, they got a permanent rate, the effective tax rate went up, like we talked about, so the 250 deductions went down. Our foreign tax credit, the amount of foreign tax credit we used went down.

Each little piece of this became very changed. So there is like, again, these little changes and mainly the changes are for the worse. Mainly the changes are making the taxes higher, but especially now that we can use more foreign tax credits, maybe there's places to play. So I don't know if there's another foreign question. Yes. Okay, good. All right. Polling question number five.  [Poll #5] Just to kind of summarize while we do this, I'm going to move on from here into the downward attribution discussion. So that was the main crux of, oh, when I'm doing a tax return, what calculations am I going to see that are going to change, what's affecting my taxpayers after their structuring is already set?

That was it. So again, when I go back to just thinking in my head, how impactful is it? It's impactful, but it's more subtle.

I think that's really the crux of this, or at least how I'm sort of letting it come in my head as we're going through this. So we're going to move on from here to looking at downward attribution and how that changed or didn't change. And again, as we're doing it, I want you to kind of think about how impactful What does this mean? Do I have clients that are going to be affected by this? What's the net effect going to be? And again, partially I'm just looking more like from an intellectual discovery or interest standpoint. What does that mean for my clients or what does it not mean? And again, I'm going to show you specifically when it comes to this next section specifically when it comes to this next section with downward attribution that maybe it means nothing for our clients or maybe this was just really more of a technical correction in a lot of ways.

I'm going to show you what I mean in a minute. I'm going to close the poll and yes, mostly everybody got it right. If the haircut became 90% reduced from the ... It was at a 20% haircut and now it's a 10% haircut. So we are at 90% taxes that we are allowed to use.

Good? Everybody ready to talk about downward attribution? Yeah. Don't all clap out once. Yay, we're ready. Okay. So the first big thing that everybody heard when OEVKA came out and they got so excited and oh my God, I had a couple of times where somebody else in the firm would call me and be like, "Did you hear there's no downward attribution anymore? How is that? That's going to change so much for our clients? Woohoo." In the Tax Cuts and Jobs Act, the portion of the code that was repealed that was preventing downward attribution. So the portion of the code that was preventing downward attribution was repealed in the Tax Cuts and Jobs Act and in the OBBA, it was restored. But even though it was restored, they added a new section called 951 Cap B. So we had 951 cap A, which was our GILTI NCTI section.

So now we've got cap B and that sort of brings back downward attribution a little bit differently. So yes, downward attribution is gone except if you are one of the people that fits into the 951B rules. So we're going to go through it. First and foremost, we're going to go through downward attribution to make sure we understand it. Apologies in advance for anybody that doesn't want to hear this.

I think the way that I heard downward attribution explained to me the best. I used to try to say, "Ah, it's whatever the foreign parent company owns as if the US subsidiary owns it. " And it was a confusing way for me to understand it. The way that I heard it explained to me the best is you're going to have the US subsidiary standing in the place of the foreign parent company. When we do downward attribution, if the US subsidiary, like in this basic, this is our basic, most basic structure chart when we're talking about downward distributions, you've got a foreign parent corp, you've got a foreign subsidiary, you got a US subsidiary. So all of a sudden downward attribution said, "Okay, we're going to take the US subsidiary and we're going to treat the US subsidiary as if they were standing in the place of the foreign parent company." All of a sudden it's as if they own 100% of this foreign subsidiary and now it's a CFC.

Maybe we have income inclusions, maybe we have, besides that we have all this reporting, that was huge. That was massive. It made a massive big deal when it came out when this started happening and I saw like we had like crazy structure charts and it was how is this going to affect and how ... And then there was regulations that came out 2019-40. It sort of slowed things down a litle bit, 2019-40 because it made certain exceptions like an unrelated constructive US shareholder, which is going to become something important for us to look at soon, but it made it slightly less impactful, but still definitely impactful, very impactful. I know, for instance, I have a client that had, because the debt repeal of downward attribution ended up with about 150 foreign filings every single year on their tax return. So maybe just think about they had like a million disregarded entities all held by publish now a CFC.

So it was crazy. When that came out, it took a lot of adjusting and then RevProc 2019-40 came out a little bit later. It was very helpful for us. So pre-Tax Cuts and Jobs Act, we looked at this and we said, "We're all good. There's no CFC here. There's no filings, no subpart F." After Tax Cuts and Jobs Act, said, "Okay, the US subsidiary is now sitting in the spot of the foreign parent company. We have the foreign subsidiary is now a CFC or what we would call a foreign controlled CFC of the US subsidiary." So to speak, if it was standing in the place at the parent company, the US subsidiary would have been what was called a related constructive US shareholder. So that would be like the category 5C or 1C and the related constructive US shareholder would have to file a 5471.

They would have income inclusions, really the whole nine yards, whatever. So it was a big change sweeping change and a lot of things and again, and one of the things about this, the whole thing that changed is like right now we're looking at a very, very basic structure, but what ended up happening is that you'd have these like crazy ... I don't know everything that my parent ... I have a bunch of investors and I don't know everything that my investors own. So what if I'm a foreign company and I've got all these venture capital investors and all my ... I'm an Israeli startup. I got venture capital investors and all my venture capital investors, maybe they have a US investment somewhere else. So what? I just became a foreign controlled CFC. So again, RevPark 2019-40 came out. There was some rules about economic ownership.

There was the related constructive and unrelated constructive US shareholders, the exception. So they did the unrelated constructive US shareholder sort of saying they don't have to file 5471 and they don't have to pick up income because they don't share ownership really with this foreign controlled CFC. But again, it really kind of was sweeping and again, and before 2019-40 came out, it was even more petrifying because they're like, "What? Again, I'm going to have to go back to my investors and ask them all of their other investments to try to figure out if I'm a CFC or not. What am I going to do here?" So it would get very complicated. And so the first thing everybody heard with Tax President Jobs Act is yay would be ... I mean, with OBBA, yay would be downward attribution is back and we're going to look at that in a minute.

I wanted to just again show the downward attribution in practice. So we've got our same structure at the foreign parent company, it's not a US entity. So remember, they're not filing a 5471. They're not filing a US tax return unless they have US Source income, but probably don't. The US Source income's probably the US subsidiary, but imagine if the foreign parent company has two owners. There's an NRA who's a 90% owner and there's a US person who's a 10% owner. So we already said that our US subsidiary is what's called a related constructive US shareholder. So in the world of downward attribution, the related constructive US shareholder would file the form 5471, they would have subpar definite guilty inclusions. They'd have to pay taxes on it. Now the US person is not related to the foreign company that's related would be like a 50% share in ownership.

They own 10%. But what happened is that before downward attribution was repealed, they owned 10% of a foreign company who owned 100% of another foreign company. So they own 10% of two foreign companies. So maybe in year one when they purchased their asset or when they, what's it called? When the entities were created or when they made their investments, they would have a 5471 category three, but never would have an income inclusion and not a yearly filing. All of a sudden this US person is what's called a 958A US shareholder. That means that they actually directly own shares in an entity that we have now deemed a foreign controlled CFC. So now the US person has to file 5471, they're going to have some predefined guilty inclusions and so that was like a huge change. Again, we're saying downward attribution is back. Little secret as we go forward is that the impact for this US person in this picture with the new rules didn't really change.

So those sweeping, like scary, I have this crazy structure and maybe I have to ask my investors, that's gone. We don't have to worry about that anymore, which again, many of us really because of 2019 dashboard, probably weren't worrying about it quite as much, but that part's gone. But for my US person in a structure like this, not so much, still pretty much the same, which again, I'm going to go through it all with you. We're going to look at the code and we're going to understand exactly what and why. But first, because I needed to understand exactly why and why I needed to make sure that you got this structure and obviously this is quite simplified again, I just want to get the concepts.

Okay. Now let's look at these new rules, 951B. I'm skipping the beginning of 951B because the beginning of 951B is really saying what the rule is, but the second part B and C of 951B, little little C of 951B are the definitions. So it's really important that we understand how to read this. I know that when it first came out, I was like, "I'm trying to understand this. " And then I pulled up on my screen the code sections that they were quoting and those and I read it with the substitutions and then I understood it. So it's really important that we do the same thing. Once we understand the definitions, then we can look at what the law is now and say, "Okay, how is this going to app?" So B says for purposes of this section, the term foreign controlled US shareholders, so that's also actually a new term, which you're calling FC US, foreign controlled US shareholder means with respect to any foreign corporation, any United States person, which would be a US shareholder with respect to a foreign corporation if, and now we look at 951B, it said more than 50% instead of more than 10% or 10% or more.

So if we look at 951B when we're talking about what's a US shareholder, so we're saying US shareholder means a United States person who owns within the meaning of Section 951A, which means that they have an ownership or they have some sort of constructive ownership, which was 950 and little B, 10% or more of the total combined voting power or 10% or more of the total value of the shares of such a corporation. So in this situation, instead of 10%, it's going to say 50%. So if we look back at our old structure chart and we're going to say, "Okay, we put our US subsidiary standing in the place of the foreign parent." When they stand in that spot on the structure chart of the foreign parent, they own more than 50%. So they would fit the definition of foreign controlled US shareholder. "Oh, but you're going to tell me 951 prevents that because that was not repealed anymore, right? That was the part, the section of the code that this allows this downward attribution or stopped this downward attribution and it wasn't repealed anymore.

Oh, so you're saying," Oh, what do you mean? "But they're not standing in the place of because we have 951B4. And then what does the next part about this say? Section 958B were applied without regard to four. So for purposes of this, if someone owns more, if there's a foreign control, if someone is a foreign controlled shareholder, if you were not thinking about downward attribution, if you were allowing, meaning we were all saying 958B4 is back, but when we're looking at what's the definition of a foreign controlled US shareholder for 10 for a minute that 951B for what is still repealed does not exist and then say," Okay, am I standing in the place of a foreign parent and owning more than 50%? "Is that clear? So when we're defining the term foreign controlled US shareholder, it's a US shareholder who a US person who is owned by a foreign person, or I guess we're going to say person entity or whatever, owned by a foreign entity or person when they own 50% instead of 10%.

So we're using our 10% threshold for regular US shareholder. We're using our 50% threshold for a foreign controlled US shareholder and it's in instances where in these purposes, if they're owning more than 50%, that right attribution is back there, good? All right. I like comments, questions, emojis, anything just like to hear from you guys.

So one problem with the webinar is I can't see your faces, so I don't know if you're understanding what I'm saying or not. Okay. So then if we look at 951B little C, what's the definition of a foreign controlled foreign corporation? So again, the names changed a litle bit, lots of name changes here, like you said. So before we used to call it like a ... I guess we did call it a foreign control or we call it a foreign CFC. So now it's foreign controlled and the foreign controlled US shareholder is a totally new term, which I kind of like because it explains it a little bit, foreign controlled US shareholders. So it's owned by a non-US entity, so it's foreign controlled, but those are kind of new terms. So you have to kind of get used to those terms also. Okay, so what's a foreign controlled foreign corporation?

So for the purposes of this section, the term foreign controlled foreign corporation means a foreign corporation other than a controlled foreign corporation. So meaning if somebody's already a CFC finished, which would be a controlled foreign corporation if section 957A were applied by substituting foreign controlled US shareholder for US shareholder and remembering by substituting 951B other than paragraph four by substituting in the same section, so should say 958B other than paragraph four thereof instead of just 958B, meaning again, take out that the repeal of downward attribution or the inaction back again of 958B4 for this section, it's going to be other than 958B4. So which section is it talking about? So let's look at 957A. So for purposes of this title, the term controlled foreign corporation means any former corporation of more than 50%. And this is something that we all know, the total combined voting power or the total value of the stock is more than 50% within the meaning of section 958A or applying other rules is going to be a CFC.

And again, it says at the bottom based on the 958B, but we're going to do of ownership of section 958B, which we're going to now replace of ownership of section 958B except for other than paragraph four. So if anybody is applying the rules of ownership, either of 958A, which is direct ownership or constructive ownership, which is the 958B, other than 958 we're going to have a US shareholder. So what is this saying a controlled foreign corporation? So If you look at 957A, that's basically saying a controlled a CFC is an entity with more than 50% of the total combined voting power or stock value is owned by US shareholders. Now we're saying we're going to keep with the more than 50%, but we're going to substitute US shareholder for foreign controlled US shareholder, which we defined on the last tab as any entity where if there was downward attribution, they owned more than 50% of a foreign company.

So anytime that we have now a foreign controlled US shareholder, again, it's the 50%, so it kind of matches the foreign controlled US shareholder and they own more than 50% of a foreign company owned, standing in the place of owned more than 50% of the foreign company, then that foreign company is what's going to be called a foreign controlled foreign corporation.

Okay. So somebody asked an interesting question about this. Does the US owner still need 10% to count towards the 50% CFC threshold? So it's interesting because if the foreign controlled US shareholder only owns 40%, then it wouldn't all of a sudden become a CFC for the US shareholder because the foreign controlled US shareholder would lose its definition as a foreign controlled US shareholder as soon as it was below the 50%. So it wouldn't really matter what the US person owned, meaning we would first look at this without including the US person in it at all. And if this is above the 50%, then we would look at the US shareholders. But if this is below the 50%, if we look at the previous slide, if this section is below the 50%, then this person's not even considered a foreign control US shareholder. So first, if you're dealing with downward attribution and you're also having US entities in that mix somewhere, first look at if they fit into this definition and then look at what are the other shareholders, what's going on with the other shareholders or the US shareholders.

Again, the US shareholder might get trapped once something's a foreign controlled CFC, then the US shareholder, if their 10% or more are going to be trapped now having a CFC in their structure chart, but we're not looking at them to get to the 50%. We're literally looking at the foreign controlled US shareholder. So if downward attributions still existed and this US subsidiary entity or whatever owns 50% or more, it's what's considered what's called a foreign controlled US shareholder and then we have foreign controlled corporations. So what's the rule? So this is the general rule. In the case of any foreign controlled US shareholder of a foreign controlled foreign corporation, this is why I wanted to define it first. This subpart and anything other sections, 951A, B, 957, so all of our income inclusions or whatever is going to be applied with respect to such a shareholder.

And again, we're substituting all throughout it. We're going to go substituting foreign United States shareholder to foreign controlled United States shareholder or by substituting controlled foreign controlled foreign corporation anywhere that you see controlled foreign corporation. So once we fit into this definition, we're going to look at all the different rules about CFCs and we're just going to substitute. Instead of it saying US shareholders say foreign controlled US shareholders. So when we're reading them, we just have to change the way we're reading it. Always means a little back and forth and fun, you like that sort of stuff. The second part of this says section 951A shall be replied with respect to such a shareholder. And again, by treating each reference to United States shareholder in such a section as including a reference to such shareholder, and by treating each reference of controlled foreign corporation to ... So the same thing.

When we're reading these, we are just kind of changing the words to make it apply. So what does this mean in plain English? I like the plain English section. Basically, once the US person hits that foreign controlled US shareholder definition, you got a CFC because remember it's 50%. So they don't hit that definition if they're not. So once they hit that definition, you've got this foreign controlled CFC and the 951B is basically saying this is going to be treated like a CFC.

If you have other US shareholders, now they're owners of CFC anywhere that it says anywhere with subpart F or within 95281, a GILTI applies, any of those sections, it's going to just change the words to foreign controlled US shareholders. So they're subject like any other US shareholder. That's the bottom line, plain and bottom line, but you have that 50% threshold. The nice part about that 50% threshold and that does change something that, like I said, it doesn't put us now in a situation where if I have an investor in my company, I have to go say to my investor, "What else do you have? Maybe I'm a CFC." So for those of us that are practicing in Israel, because we have a lot of venture capital going on over here and venture capital has money coming from all over the place, we see a lot of what we'd call portfolio companies actually providing CFC testing statements or whatever to the venture capital funds for which they're investors.

And so they themselves are actually taking on the responsibility of testing if they're a CFC or not. And so in the olden days, we might've said, "Oh God, we got to take a look at how much do you own and how much do all of your investors own to kind of figure out ... " And it wasn't always very possible so we would do the best we could. Now it's got that 50% threshold. So if somebody's not owning 50%, if there's another entity that owns at least 50%, 50% or more than 50%, then you probably have all of the other information about what they hold. There's definitely not chasing after little shareholders and asking them for their other pieces of information. A lot of that, like I said before, was already taken care of with 2019-40 with the regulations, but now it's written into the law, which is nice.

Oh, this is another question, great one. [Poll #6] I'll let you all answer that.

I do think for myself, this is useful. It's definitely, first of all, just to be educated and understand the differences in the laws, even if the outcome isn't that different. And like I said, there are portion pieces of it where the outcome does change, but definitely I'm going to experience this in my practice and when I'm doing planning with my clients. So it is definitely something I know I will see on a regular basis. Although not as exciting as first hearing, downward attribution has been repealed or whatever is back, whatever it was, however they said it's not really that exciting. Give you guys another few seconds.

Anyone else want to answer? Anyone have a question before I move on? All right. Don't worry. It's not coming out on the main screen with this response, you don't have to worry that you ... All right. So now I wanted to kind of, again, let's get a little practical here. So we read the code. We understood what downward attribution was. We read the code, so we kind of understood what the changes were in big picture. Now let's look at what actually changed in practical. So again, we're taking our simple structure chart that we looked at before TCJA comes in, that US subsidiary is a related constructive US shareholder. Because they are standing in the place of the foreign parent, the foreign subsidiary becomes a foreign controlled CFC and the US person now also owns the CFC, whereas they didn't own the CFC before. So after the reinstatement of 958 if we kind of put it in steps, so they're no longer a constructive US shareholder.

So they have all those filings who say they have no subpart F guilty conclusion anymore because of downward attribution, but then 9521B comes in and we say, "Ah, air foreign control the US shareholder because again, they're more than 50%." And it's as if downward distribution was back and that becomes the foreign subsidiary becomes this foreign controlled CFC and there's 5471s and income inclusions and all of that. Again, for a US person, so after the reinstatement of 958B-4, so all of a sudden they're the only 10% owner of the foreign entity, so that doesn't make them a CFC. There would be no 5471, there'd be no income inclusions, all of that, it's because it's not a CFC anymore. But then 951B comes in and says, "Nope, it's a foreign controlled CFC and now this US person owns 10% of a foreign controlled CFC. They've got to file a 5471 and they've got to file, then they might have income conclusions." So bottom line, in this situation where you've got 100% ownership, nothing really changed.

Now I'm going to look at a little bit more of a real world example with you in a minute. It's really important to me that you understand one very big thing. When 2019-40, when the regulations 2019-40 came out, a lot we got a lot of clarity, we got exemptions or things that we didn't have to do following these rules versus when the demo attribution rules first came out, again, it gave us a lot of clarity. It told us where we had exemptions. It showed it made that exemption for unrelated constructive US shareholders, things like that. We don't have that yet for a 951B. So if we don't have that yet for 951B, that means that we're still waiting for certain pieces of information. So even as we go through a structured chart and I make guesses of what the next steps are going to be, some of them are guesses because not every piece is clear just from the law and we don't yet have regulations written that explain the law.

So it's a very, very important thing to keep in mind when we look at the next slide. This one is very simple because we've got 100% ownership, it's obvious, it's related, it's clear. When we start looking at unrelated but maybe or through partnerships here, it's through corporation, it gets a little bit more confusing. So I just want you to keep that in your brain as we're going through our analysis that we're still waiting on regulations and hoping and praying that they come out sometime soon and that they help us and that they're good. Again, when 2019-40 came out, I think a lot of people were able to take a sigh of relief. It was very clear. It made a lot of sense. Hopefully it won't drive us too crazy, although it created all these new words like related constructive US shareholder or unrelated constructive US shareholder or 958AU shareholder.

I mean, it kind of added definitely to our vocabulary, which is we see a big thing of this rule of the OBBA is learning all these new names, but I do believe that there will at some point be regulation, hopefully that comes out and the regulation will hopefully provide us some guidance in places that it's not 100% clear. I'll tell you spots where I'm sort of guessing so you understand. I'm not guessing I'm making an educated sort of idea, but until the regulation really comes out, I don't know for sure. So what I'm going to do on the next slide is I've brought up as close to a real life structure as a client of mine, for real. So this is actually the structure of the client that I told you all of a sudden ended up with about 120 or something like that foreign filings.

So imagine if underneath the offshore master fund, you had like 120 entities. So in the private equity world or also in the hedge fund world, but in the alternative investment space, we do a lot of times what's called master feeder structures where we'll have blockers, meaning we'll have our US activity in one entity. We'll have our offshore activity in another entity and then we'll have our limited partners coming in either on the US side or the offshore, which is the offshore's going to be NRAs and tax exempts and all those people and we're going to stick blacker corporations, close entities between all of those people and any ECI or UBTI or anything like that. So that's a master feeder structure is a very like standard in the alternative investment space. So now think about if you have a master feeder structure. So again, real life, you've got your US master, you've got your offshore master, they both have portfolio companies or investments or whatever.

And the US feeder, because again, remember the US shareholder doesn't want to add layers of taxes if you do a corporation and then you do them, you've got taxes, they're paying taxes in the US anyway, so they don't care if they have ECI and they're paying taxes on worldwide income so they could just get direct, whatever the offshore master's income is producing, they can just get that they don't care. So you've got your US feeder sitting on one side and the other side you got your offshore feeder and in this case you have tax exempts in there and non-resident aliens. So you want all ECI and UBTI, meaning you want any income effectively connected with a trader business in the United States, but also any sort of business income blocked. So we've got two corporations, they're closed. One is blocking the US master's income, the other is blocking the offshore master's income, which means that those two entities are getting the flow through income.

They're paying taxes on that income and then they're distributing dividends to the feeder. And then the feeder is a partnership and it's not a US partnership and it is maybe giving K-1s, maybe not. But those non-US people are being blocked. They're not paying taxes in the US are tax exempts so not paying taxes on UBTI, all of that fine. So you have this really great structure and it really helps everybody on the offshore side, but then downward attribution gets repealed. All of a sudden our US blocker becomes, remember it's going to stand in the place of its parent company, the offshore feeder and it's going to be attributed 100% ownership of the offshore blocker. So now the offshore blocker becomes a foreign controlled CFC. And then again, we're going to look down to, it doesn't really own anything in the offshore master, but we're going to look down, we're going to say it's standing in the place of the offshore feeder.

And so it owns the offshore master and everything the offshore master owns, which is all these portfolio companies that it now owns 100%, which are now all foreign controlled CFCs. So there's not a typo here, but if you look at under some of the things I have where it says TCGA, GA, and then OBBA, just so we can understand how things changed. So under TCGA, the US blocker was either related or unrelated and this is where there's a typo because I wanted it to say just constructive US shareholder, but sorry, the US blocker is a constructive US shareholder. If they're related, that means if the offshore feeder was a corporation, if for sure means they're related, that means that related means the same ownership of at least 50%, which again goes to our 50% time. If they're related, they're filing 5471, they're filing a 5471, they're having income inclusions, all of that.

If they're unrelated because of 2019-40, they don't have to file a 5471. They don't have any income inclusions. When would this possibly be where they're unrelated? And this is a spot where I am waiting for regulation. If the offshore feeders a partnership and they've got a million different partners and nobody themselves is really owning more than 50%, so it's unrelated in the sense that ultimately it is the owners of that US blocker are not related to each other. There's less than 50% ownership going on over there. If it's an unrelated constructive US shareholder, it doesn't have to file a 5471. Again, this is under Tax Cuts and Jobs Act. It doesn't have to file a 5471.

It doesn't have any income inclusions, but that doesn't mean that the portfolio companies below aren't still foreign controlled CFCs. And again, our US feeder entity is still, again, from the tax cuts and jobs, this is what we would call a 958 US shareholder and then they're still a US shareholder of a foreign controlled foreign corporation. So regardless of if the US blocker has to file a 5471 and pick up income, the US feeder now has to file a 5471 and pick up income. Under OBA, the US blocker becomes a foreign controlled US shareholder and regardless of if it's related or unrelated, it's a foreign controlled US shareholder, which makes the offshore blocker our foreign controlled CFC. It makes portfolio companies a foreign controlled CFC. And again, for our US shareholder, at least when it comes to the offshore of the portfolio companies, it's a US shareholder of those foreign controlled CFCs.

So once it's a US shareholder, those foreign controlled CFCs, it has to file a 5471. It has income inclusions. So the fact that we've put the US blocker into place, it became a foreign controlled CFC. Our 10% US shareholder, in this case, 20% US shareholder is going to have to file the 5471s pick up the income. Again, it's a partnership, so maybe not. Maybe they don't have any 10% owners on top. So maybe there's not an income inclusion, but there could be a lot of filings out of this. Is that clear?

Anyone? Any questions on this? We're going to look in a minute at a chart to understand what changed and what didn't change or what we're not so sure changed. All right. I'm going to take this silence to mean that it's clear. All right, if we go off to the next tab, I kind of almost wish we were looking at, but I want to show you this. Okay. OBBA for our US blocker, we're going to look at this for a second as if they're a related constructive US shareholder and then I think we're going to go onto the next page. So if they're related constructive US shareholder pre OBBA, they were filing 5471 and they were even picking up subpart F.

And then the US feeder, I think this was in this one, we said the offshore blocker has $10 million of passive income. So just to kind of give us an idea, the US feeder is a real 958A direct owner of this entity and they're now of really of the portfolio companies. So if they have income, if they had $20 million of passive income, so they're going to have a $2 million subpart F inclusion, assume that that entity has one owner or whatever it is. Post OBBA, there's no more downward attribution, but the US blocker gets locked into the 951B rules. The one thing that does change in the 951B rules is that the income inclusion is based on actual economic ownership. So they don't have any income inclusion, but they still have to file 5471. It's still a foreign controlled CFC because they still have to file a 5471 and it's still a foreign controlled CFC, guess what?

Our direct shareholder is still now an owner of a CFC. And so because he's still an owner of a CFC, he's got a $2 million subpart F inclusion at his 5471s. In this world where he's not an owner of the CFC, in this world where the US blocker would not have been a foreign controlled US shareholder, the US feeder only owns 20%. So if we look back here, if we go back to our structure chart again, in this world where this guy who doesn't really have any ownership is just here and we're looking over here to see who owns them. Okay. The US feeder owns 20%. Why would 20% cause any form of ownership in any of these entities? I mean, it causes ownership, but why would it cause a CFC? Okay, at the US feeder, we've got a CFC. So again, the same thing under the OBBA, because of 951B, it's as if the US feeder is standing in the place of the offshore offshore feeder.

So it owns 80% of the portfolio companies down beneath that makes them foreign controlled CFCs and our US feeders got to file a US feeder is an actual shareholder, they got to file a tax return, they have an income inclusion. So their bottom line did not change. Okay. Very important to keep that in mind. That US feeder is still filing 154.71 and still calculating income inclusions. Again, partnerships, the way the income inclusions work is, it's not on the partnership level, it's up. So maybe not, maybe yes, but theoretically they're calculating income inclusions and that whole bottom section, the whole portfolio companies are CFCs for their purposes.

And then this is where I'm not really sure and I don't have regulations. So if we looked, let's look back at the structure chart actually for a second. If we looked at the structure chart, really what we would say, and again, this was what we got from regulations, is that the offshore feeder is a flow through entity. So we're going to look back up through the ownership of the offshore feeder and because the offshore feeder, I'm using my mouse on the thing as if you guys can see it, because the offshore feeder has a bunch of different partners and none of them are related. And so the US blocker really becomes an unrelated constructive US shareholder in the Tax Cuts and Jobs Act. So if they're an unrelated constructive US shareholder, what would happen to them?

They wouldn't have to file a 5471. They wouldn't have an income inclusion. Great. Now our US feeder that those portfolio companies are still a portfolio companies are still foreign controlled CFCs. So our US feeder would still own the foreign controlled CFCs and they still are a 958 direct owner. So even though the US blocker doesn't have to file a tax return, it's unrelated constructive US shareholder, even though they don't have to file a US tax return, the US feeder would still have to file the 5471, have the income conclusions. Okay, post OBBA. So this is the part that I'm unsure. I don't know if anyone has an idea, I'd love to hear from them, but post the OBBA, we've got this foreign controlled US shareholder. So if we looked at the structure chart and we just stopped at the partnership level, is a foreign controlled US shareholder because it's more than 50%.

Do we do that or do we look through to the ultimate partners? If we look through to the ultimate partners, then we could say there isn't more than 50% because none of those ultimate partners own more than 50%. Who cares that the partnership itself owns more than 50%? I'm not 100% sure. In a situation where we're looking through to the partners, so we would be like that unrelated constructive US shareholder, we don't have a foreign controlled CFC anymore. If we don't have a foreign controlled CFC anymore, our US feeder would also not have any more filings. I'm not 100% sure. It's not clear. I talked to Claude, I talked to Copilot, everybody, they both had different opinions, but I did not check Gemini. Maybe I should have asked Gemini what they think also, but it's not 100% clear, meaning again, if we were to look at the structure chart and stop at the US feeder at the offshore feeder level, we'd be dealing with, okay, it's more than the 50% threshold, but are we really because it's a partnership looking through to the partners in the Tax Cuts and Jobs Act, the unrelated constructive US shareholder didn't stop it from being a foreign controlled CFC.

It just stopped that US block from having to file a tax return. If we're going to look through the offshore feeder to the partners, we're going to stop the portfolio companies from being foreign controlled CFCs whatsoever because again, you only fit into this US blocker only fits into the definition if there's more than 50% ownership. And if you were looking at all the guys on top, there wouldn't be more than 50% ownership and that would really save the US feeder a lot of headache. I tend to think that we're looking at the offshore feeder only because it seems too nice to just totally like that would really be a very big change that would save a lot of money for the US feeder ultimate. So I kind of like to think I'd like to err on ... I wouldn't like to err on. I'd love for it to be that we're looking through to the partners.

I'm not sure, but I could imagine that the people writing the laws are not kind enough to just completely get the US feeder out of all of its filings and possible tax payments. So I could imagine that we're looking at the US feeder for the 50%, but your guess is as good as mine, if anyone has any thoughts on that or anybody wants to ask Gemini or ChatGPT what they think because like I told you, both Claude ... Okay, yes, Claude said that it's a foreign controlled CFC and Copilot said that it's not, which I thought was interesting and wrong because it was just like, oh, it's not like you didn't get it right. AI is not always right, but it is definitely interesting to ... It's an interesting point and that is where I really am bringing out we don't have regulations yet, so I hope that the regulations will clarify for us exactly where we're looking when we're doing these calculations, but that is the big changes for downward attribution.

So again, were these changes really so significant? Ultimately, how much the US feeder, the way that we're looking at it probably has zero change. The US blocker does have a change because if they're a related constructive US shareholder before they might've had an income inclusion now, at least the income inclusion amounts are looking at actual economic ownership, that's great. They don't have an income inclusion. That's wonderful, but they might still be filing and all of that other headaches. So it's definitely a change. Do people not hear me?

Matt Weiser:
I can hear you.

Ayelet Duskis:
Anyone? Okay. Thank you. It's definitely a change. Is it a huge change? Again, I don't know. It's not 100% clear and as soon as regulations come out, I'm going to be the first person reading them a crazy person, but no, I guess I should be smart and I should let AI read them and then give me the summary. I'm going to actually read them in depth because I'm an urge. So I say it with pride, but I'm sure at some point there'll be regulations that will explain to us a little bit better about how we're, if we're looking through partnerships or if the partnership is there, but that would make a massive change. Otherwise, I think the changes are more subtle again, so we're using the word subtle today, but that's really again, downward attribution, the rules preventing downward attribution are restored except for when you're dealing with more than 50% ownership and then it's back and then you've got the whole same balagon.

And that is basically the end of my section, which is all the rules. So now we get to the part where like, how do we actually put those rules into practice? What's it going to look like? How it's going to affect our taxpayers? How's it going to affect our clients? And so to do that, I'm going to give you Matt who is our also corporate tax manager here in Israel and who I would definitely not be able to survive without and definitely spends a lot of his time sticking these numbers on or reviewing these numbers on forms to make sure they're correct. So he's going to show us what this is going to look like in the practical sense of the word.

Matt Weiser:
All right. Yeah. So thanks Ayelet. So far we've stayed at the structural level who counts as a CFC, who's a US shareholder, how downward attribution works and which entities with 951 capital B pulls into the system. So I'd like to shift now from the conceptual to the practical. This is where the rules start showing up on the actual return. So for the next section, we'll take one fairly ordinary situation, a US parent that owns a foreign operating company and we're Running through the numbers twice, once under the law as it stands for 2025, the current law, and once under OBBA beginning next year in 2026. The same company, same income, same foreign taxes paid. The only thing we change is the law and the bottom line moves from more than what you might expect. The example on the next slide we'll see in a minute is a CFC paying 13% foreign tax rate.

Under the current regime, 13% was generally enough to wash out the US tax. Under OBBA it isn't and the residual US taxes rise significantly. I'll show you exactly where that comes from. After the corporate calculation, we'll do the same exercise for the export incentive that FITI since that regime shifted as well. Then I want to open the actual forums with you and trace a single number from the foreign subsidiary's own books all the way down to the parents form 1120 so these changes feel concrete rather than just theoretical. So let's start with the corporate calculation. The example on this slide is CFC paying 13% foreign tax rate. Sorry,

Matt Weiser:
So yeah, this slide captures the CFC impact of the OBBA in a single comparison. So let's see the facts first across the top. We have a US parent that owns 100% of a controlled foreign corporation and that CFC earns $1 million in tested income. Essentially its operating profit falls into the guilty now NCTI category. It pays $130,000 of foreign tax, which is 13% effective tax rate. To keep things clean, we assume no QBI so there's no tangible asset carve out complicated in the picture. US corporate rate is 21% in both columns. None of these facts differ between the two scenarios. Only the law does. Now let's go through each row. So row one, the inclusion. $1 million enters the US parents return both before and after identical. Nothing happens here yet. Row two is where OBA first shows up. The section 250 deduction, the deduction that made guilty a reduced rate regime in the first place drops from 50% to 40.

So instead of deducting 500,000, the parent deducts 400,000. That $100,000 difference drives everything below it. In row three, taxable income under current law, a million minus 500,000 leads 500,000, that's it and a half. Under OBBA, a million minus 400,000 leads 600,000. So we added $100,000 in taxable income purely from the smaller deduction. Moving on to row four, we apply the 21%. The US liability before credits rises from the 105,000 to 126,000, about $21,000 more. OBA does give something back and that's on rows five and six. The foreign tax credit improves. Under current law, you lose 20% of your team paid foreign taxes. So only 80% are creditable. OBVA has that to 10%, so 90% becomes eligible. In row six, the dean paid credit rises from 104,000 to 117,000 or $13,000 more. That's a significant improvement and it's the piece people point to as favorable. But looking at row seven, which is the number to hold onto, the net US tax before OBA one is $1,000 and after OBVA, it's 9,000.

So on the same economic facts. So why does this happen? This is the misconception that you might hear in the upcoming year. People see deduction down credit up and assume it roughly evens out, but it doesn't. The smaller deduction added $100,000 of taxable income, 21,000 of tax. The better credit returned only 13,000. So you end up about $8,000 worth off, and on a base that was only $1,000 to begin with, that's a ninefold jump. The reason behind all of it is the breakeven rate, which is the note at the bottom. So under the old GILTI math, a CFC paying around 13.125% of foreign tax fully eliminated its US residual. OBBA raises that Greek even to 14%. So RCFC pays 13%. It used to clear the line. Now it sits below it and anything below 14% generates a residual US tax that simply wasn't there before.

So for anyone with foreign operations, pull the effective foreign tax rate for each of your CFCs and compare it to 14%. Any subsidiaries sitting between roughly 13 and 14, which used to be a comfortable position to be in, will now start producing US tax. That's the modeling worth doing before year end rather than next year on April 14.

So we just looked at income coming back from a foreign subsidiary. Now let's turn to the outbound incentive, the FIDI, because OBA adjusted this one too and it's easy to miss it if you're just focusing on GILTI. So just a quick refresh on FIDI. So the foreign derived intangible income is relabeled FDDEI under OBBA and it's the incentive of the 2017 tax reformat. So where GILTI taxes, low tax foreign earnings, FIDI gives US corporations an incentive to reduce rate on income they earn by serving foreign markets. So exporting goods, providing services to foreign customers, licensing, intellectual property abroad. The goal is to keep the export and IP business sitting inside the US rather than just pushing it offshore. So now we go run the same side by side. So the facts are domestic C corporation $1 million of foreign derived deduction eligible income and we assume ample taxable income so we don't trigger the section 250 limitation, which keeps example easy to follow.

21% corporate tax rate, that's the same. In row one, the FDDEI itself, $1 million, that also hasn't changed. In row two, we follow the same pattern as the GILTI side. Section 250 deduction shrinks and on the FIDI side, the rate moves from 37.5% to 33.34. So the deduction falls from 375,000 to 33, 33,400. In row three, the taxable FDDEI after the deduction rises from 625,000 to 66,600. Grow four at 21%, the US tax goes from 131,250 to 139,986. In rows five and six translate into the figures that matter for planning the effective tax rate on your export income rises from 13.125% to 14. That's roughly $8,700, more tax on every million dollars of qualifying income. So the symmetry I'd like you to notice in, it's not a coincidence. So think back to the previous slide, guilty's effective tax rate rose about 12.6% and its breakeven climate to 14.

Fitty's effective tax rate is now also 14. Congress is deliberately moving the inbound minimum tax and the outbound incentive towards the same rate. So under the old law, you had 10.5 and 13.125 and under OBBA there are 12.6 and 14, which are much closer. So this narrowing is a policy choice to reduce the arbitrage between the two regimes.

The message for exporters and IP heavy businesses, city is still worth having. You're still meaningfully below the 21% statutory rate saving about seven points rather than the old 7.875, but the advantage is slightly smaller. So if you build out models or made stretching decisions around the old rate of 13.125, now those are out of date and you should update them to 14. Next slide.

Ayelet Duskis:
Into add. Yeah. Say your polling question and I'll add.

Matt Weiser:
Okay. [Poll #7]

Ayelet Duskis:
So when we're looking at the rules and this rate jumped a little, that rate jumped a little again. How impactful is it? It's very subtle. But when you look at the numbers, thank you, Matt. It's pretty impactful. Look at that. That's a lot more taxes on both sides, both from the guilty side and from the FDDEI side. So it is, it's impactful. It might not be such crazy new rules for us to learn, but I'm seeing impactful changes because of this.

Matt Weiser:
Definitely hits the bottom line. We'll move on to the next slide once 80 or 90% answer for the poll. Just give it another few seconds. Okay. We crossed 3%. Okay. So before we open the actual forms, I want to ground us in the structure we'll use for the rest of the section because every form we look at connects back to one of these entities. So moving from the top down at the very top is the US individual who owns 10% of the US parent. They'll matter when Michael takes us through the individual section later. For our corporate walkthrough, the main actor is in the box below. So the US corp parent, the Delaware Corporation, this is our taxpayer for the corporate example. It's the US shareholder under 951 and it's Form 1120. That's what we're going to build out. So it sits above three branches.

On the left is CFC Opco organized in Ireland. This is the central entity in our example. The CFC generating that $1 million of NCTI at 13% effective rate. When we discuss the corporate calculation, this is where the income generates. So you can see it at its label 9051 Cap A or NCTI, 13% effective rate. That's the subsidiary from the slide we just covered.

In the middle is four cohort in the Netherlands, which is a hybrid entity that's checked the box and serves as an intermediate holding company. So below it sits USCO and four sub. And these two are the 951 cap B characters. USC is a foreign controlled US shareholder and FCUS and Foreign Sub is a foreign controlled foreign corporation, FCFC, which are the new categories OBA created that we discussed earlier. So I'm including them so you could see where they live in a real structure. Yet also gave an example, even though our corporate income calculation runs through the CFC opera. And on the right, we have the domestic LP, Delaware Limited Partnership. It's a pass through and not a subpart F entity on its own, but it's in the diagram because a lot of structures have partnerships and should just note partnerships are treated totally differently than corporations, but they're common in structures.

And then the color key at the bottom is worth taking a quick look, teal for US corporations, Navy for US partnerships, gold for foreign corporations and CFCs and then the outline box for the individual. So as we work through the forms, I'll refer to these entities by name so it helps to keep CFC Opco and the US core parent in mind. Those two drive everything in the next several slides.

So now we reached the part I think is most useful for the practitioners on the webinars. So seeing where these changes actually land on the returns, it's one thing to say the section 250 deduction dropped to 40%. It's another to know which form, which schedule, which line it hits that the tox software is going to populate next year. So this slide is like a map. You have five connected forms where change on the left carries to the bottom on the right. Starting with the form 5471, the CFC information return, this is where the foreign corporations data enters the US system. There's three changes here. So first, inclusion, timing. The old lastly of the year rule gives way to any day pro rata approach. So you report income based on the days you actually hold the stock. Second, the new 951 cap ilers, those FCUS and FCFC entities from the structure now have filing obligations.

And third, the 898C election that allows CFCs and fiscal year is repealed, no longer available. And then next we have Form 8992. The GILTI are now NCTEI computation. The regime is renamed beginning in 2026 and more significantly the NDTIR is removed. That's the tangible asset deduction tied to QBI. So with it gone, all the tested income comes through asset heavy CFCs that use the shelter income behind QBI lose that benefit. Third now is Form 8993, the section 250 deduction. This is where the rate cut sits, the NCTI 50 to 40% and FDDEI 37.5 to 33.34. Both regime setting on that 14% effective tax rate we keep returning to. And the fourth form here is Form 1118, the corporate foreign tax credit. The improved haircut appears here. 20% disallowed drops to only 10. So 90% of the foreign taxes become credible. There's also a basket adjustment interest and R&D expenses come out of the NCTI basket, which generally helps the limitation.

And finally, form 1120 itself, this is the bottom line. The section 250 deduction on schedule C, line 22 falls from 500 to 400,000. Taxable income rises and the net US tax climbs from 1,000 to 9,000. Same story from a few slides ago. Now we see it in the forms itself. Then just note about BEAT at the bottom, form 89.91. Beat didn't rise. OBA permanently set it at 10.5% and avoided the scheduled increase to 12.5%. So that's a piece of stable, favorable news for companies with significant related party payments. And as we said before, very high amount of gross receipts. So I show you this whole chain because next year when the rules are effective, you'll be able to point to the specific form in line rather than just the law in general. So let's go into a few of these one at a time.

So here's the reference table. The one your preparers will want decide them during the bid season. Let me point out the roles that actually change what appears on a return and you can keep this in your back pocket. Think of them in three groups. The first group is timing and filing. The form 5471 rows at the top. So the pro rata timing change on Schedule I and I1, income used to go whoever held the stock at the last day of the year. Now it's allocated by the days which each person owned it. The new 951 cab obligation for FCUS and FCFC entities and the 898C fiscal year election repealed as of November 30th, 2025. So these three govern who files and when income is counted. The second group is the rate and base changes, the source of the dollar impact. So on Form 8992, the title changes to NCTI and part two, line four.

The tangible asset return is zeroed out. On Forum 8993, there's two rate cuts. Part three, line 29, the NCTI deduction from 50% to 40% and on part three, line 28, the FDDEI deduction drops from 37.5 to 33.34. So those carry to form 1120 Schedule C line 22 where the deduction drops from 5,000 to 400,000. So I'm calling out the specific line numbers because they matter for review. So if you're reviewing next year, if you're reviewing a 2026 return and want to confirm the preparer applied the new rates, you could just look at lines 28 and 29 on form 8993 and that's where they'll be. So the third group is the foreign tax credit, the two forms 1118 Schedule B. The deemed paid eligible percentage rises from 80 to 90%, the improved error cut. That was one of the benefits of OBA and separately interest and R&D expense come out of the NCTI basket allocation, which generally helps the limitation.

So both of these are favorable for the taxpayer. The final row, 89.91 for B at 10.5%, that's permanent and that's favorable and stable. So the pattern across the table is consistent. The base and rate changes hurt. The credit changes help and on balance we saw the harm outweighs the good for most CFCs below 14%.

So now let's open the forms themselves. So here's Schedule I1 of Form 5471 populated with our CFC Opco numbers. So you could see the mechanics on the real document rather than just in the abstract. So Schedule I is where CFC's tested income gets computed and reported. The feeder schedule that ultimately drives GILTI or in 2026 NCTI inclusion. So let me walk through the top portion, which doesn't change and then the bottom which does. So lines one through six are the income buildup. The OBBA leaves these alone. Line one, gross income, 1,300,000, lines 2A through 2E are the exclusions.

Subpart F income effectively, connected income, high tax exception income, excuse me, related party dividends, foreign oil and gas. So in our example, 300,000 comes out of subpart F. Line three totals the exclusions. Line four is gross income less exclusions. Line five is the allocable deductions. And line six gives tested income $1 million. Line seven, the tested foreign income taxes, 130,000. All of that reads the same before and after OBA. The CFC computes its tested income the way it always has. Here's what changes. Follow the highlighted lines. Now line eight is qualified business asset investment QB. Lines 9A through 9D are the interest expense mechanics and line 10 is tested interest income. Under current law, all of that machinery exists for one purpose. To compute the net deemed tangible income return, the carve out that lets the CFC shield the 10% return on its tangible assets from the GILTI net.

In our example, the CFC has 500,000 of QBI, which produces a $50,000 shelter. OBBA removes that carve out. So those lines to buy and the interest items no longer affect the inclusion, which is why they're marked no longer relevant on the post ABBA side. Form may still gather the data for other purposes, but it's no longer relevant for NCTI. Looking at the lower panel, which shows the result at the shareholder level, before OBBA tested income of a million minus 50,000 carve out gives an inclusion of 950,000. After OBVA, there's no subtraction. So the full million becomes NCTI. Inclusion rises from $50,000 entirely by removing the tangible asset shelter, the QBI. The lesson here is significant for asset heavy businesses, manufacturers, anyone with real plant and equipment abroad. QBI used to work in your favor, the more tangible assets you held, the more income you shelter.

OBA ends that. If you have a CFC that relied on a large QB, a large QBI base to keep its inclusion down, that approach is gone in 2026 and the full tested income comes through.

So now let's follow that income from the CFC into the two forms that compute the inclusion and the deduction. Form 8992 on the left and form 8993 on the right. So the error between them is the key relationship. The NCTI figure that comes out of 8992 becomes the input to 89.93. So starting on the left, form 8992, Schedule A at the top is where each CFC's data lands. You can see CFC Opco with its million dollars in tested income. So looking at column C and D, the QBI and DTIR columns, those represent the carve out we just removed on Schedule I and they're struck through here. After OBBA, they're effectively zero. Then in part two, line four is the net deemed tangible income return and that's the OBBA change, eliminated, reduced to zeros. Line five, the GILTI or NCTI now simply equals the full tested income.

$1 million. Under current law, line five would have been 950,000. After the carve out now, it's the full million. So forms 8992's job is to produce that NCTI figure. So following the arrow to the right, form 8993 is the section 250 deduction. The deduction that makes this a reduced rate regime rather than a full 21%, just like the regular corporation. The structure of lines one through 21 handle the FITI and the DEI computations at the top. Then part three, beginning at line 22 is where the deduction is determined. Line 22 takes in that NCTI inclusion, our million dollars from form 8992, then it works down through the taxable income limitation lines.

Line 29 is the one to watch. So it's the OBB8 change. Line 29 is the GILTI NCTI deduction and the rate applied here is what dropped from 50% to 40%. So before OBBA, line 29 would've produced a $500,000 deduction. After that, at 40% it produces 400,000. That $100,000 difference is the single largest driver of the higher tax we saw on the calculation slide. There's also line 21 just above it, the FDI deduction on the FIDI side and that's where the 37.5 to 33.34 cut lies. The one from our second example. So you can see the chain end to end. The CFC's tested income comes off Schedule I lands on 89.92 as the full million of NCTI would know QBI shelter flows to 89.93, line 22 and that receives a 40% deduction on line 29 rather than 50 and that $400,000 deduction is what carries down to 1120, which is actually where we're going to go next.

So here's the final pair of forms. Here, everything comes together. So the foreign tax credit on Form 1118 and the tax computation on Form 1120. The credit compute on 1118 flows into Schedule J of the 1120 and reduces the tax. On the left side, we have 1118 Schedule B. The tax is deemed paid by the corporation on its tested income in the NCTI basket. Looking at the highlighted columns, column D in the applicable percentage, the haircut and column E is the taxes eligible for credit. So under current law, the haircut is 20%. So only 80% of the foreign taxes are creditable.

On our 130,000 of foreign tax, that was 104,000 of usable credit, but we add cuts the haircut to 10%. So 90% becomes eligible, 117,000. So that's the $13,000 improvement. Now set out the steps underneath so you can see it plainly. So 130,000 of foreign tax, 10% disallowed is 13,000, leaving 117,000 eligible. There's a second benefit noted there as well interest and R&D expenses are pulled out of the NCTI basket for limitation purposes, which generally allows more of that credit to be used rather than limiting it. So now we can go on to the 1120 on the right and we can see the bottom line. At the top of Schedule C, line 17 brings in the GILTI NCTI inclusion, the full million. Line 22, the section 250 deduction highlighted 400,000 under OBBA versus 500,000 previously. That flows into line 23 totaling the special deductions. Then down to Schedule J, the tax computation, taxable income 500,000 before 600,000 after tax at 21%.

So it's 105 versus 126,000. Then the foreign tax credit form 1118 comes in 104,000 before, 117,000 after and the total tax, the very bottom line, $1,000 under current law and $9,000 under OEBA. So you've now seen the complete circuit. So we began with the CFC's books on Schedule I, watched the QI shelter disappear on form 8992. Then we saw the deduction shrink from 50 to 40% on the 89.93 and the credit improve on the 1118. And then finally on the 1120, it all settles into that ninefold increase in our example in the US tax amount. So the better credit generally helped. It simply couldn't offset the smaller deduction. So that's the entire corporate story altogether.

So moving on to poll eight. [Poll # 8] If anyone has any questions, you can post it in the Q&A chat. Once we get to 80% of submitted answers, I'll just go through the right answer. Okay. The answer is B. So we made this question because the CFO's instinct is the most common error I expect to see this year. It sounds sensible, one thing down, one thing up, call it even, but the two amounts are different sizes and that's the whole point. So the smaller deduction from 50 to 40% added $100,000 in taxable income, which at 21% is $21,000, but the improved credit returned 13,000. So it wasn't enough to offset the help and the FTC wasn't enough to help to counterbalance the reduction.

So that brings us to an end for the corporate section and I'll hand it over to Michael who will take us through the individual side.

Michael Conrad:
Thank you, Matt. Yeah. So I'm just going to show everyone now an example for the individual taxpayer. So that's an individual US shareholder of a CFC. So first let's just kind of just recap some of the key changes and how they affect each of the various forms and elections. So as we mentioned earlier, the last day The rule was replaced by the any day rule, which means if you sell your CFC, for example, halfway through the year, they would put their pro rata NCTI by days held. I'll show that in the example later how exactly that plays out. And obviously all the downward attribution rules that went through earlier with regards to GILTI itself, as we know, that was renamed to net CFC tested income, NCTI. The Q by carve out was eliminated, so we now have to conclude full tested income.

And then in terms of the Section 962 election, which as we'll see, is often beneficial to make for individual taxpayers. And what we'll see here is a lot of the examples with the 962 election are going to be similar to what Matt was showing earlier since what the 962 election does is you're electing to be treated the individual is electing to be treated as a corporate taxpayer for purposes of their CFC. So for the Section 962 election, the Section 250 deduction rate was cut from 50 to 40%, which means the effective rate is now 12.6% as opposed to 10 and a half percent. Again, that break even foreign rate, that key figure is now 14% as opposed to 13.125%. As Alex said earlier, this appears small, but it can actually sometimes be material depending on the figures and we'll show that in the examples later.

In terms of the actual mechanics of the Section 962 election, those have remained unchanged.

So I just see someone's asked a question here. Can the Section 962 election rate on a year by year basis? As in you can decide to make the Section 962 election on a year by year basis, yes. So you don't have to do it every single year once you elect it in the first year, if that's what you're asking. You can kind of change that as the years go on. So as I'll go on to explain the high tax election, if you have a corporation, for example, in the UK, subject to full 25% corporate tax or other countries that hit the 90% of the 21% corporate tax rate, you can just cut down your work and just make the high tax exclusion. But if, for example, you have one year where there's carry forward losses, that brings your effective corporate tax rate to below the high tax election threshold, then you can make the 962 election in the following year.

So yeah, you can definitely do that on a year by year basis. And then yeah, as we go to form 8993, which is the mechanic and the Form 1118, which is the mechanics of the Section 962 election, the deemed paid FDC haircut has gone down from 20 to 10%. So you now have 90% which is eligible. And then you have the section 898C election, which we're not really going to discuss because it's not usually relevant to individual taxpayers. This is more for kind of corporate shareholders for CFCs. I mean, I think you can have cases where you have both corporate and individual shareholders where you might see this, but generally not so relevant to individual shareholders.

So yeah, as we kind of mentioned at the corporate level, also on the individual level, we kind of need to rethink our planning since this effective breakeven rate has gone down from 14 to 12.6%. So we should definitely be running the numbers and thinking about planning for our clients for next year when these changes come into effect. So first we're just going to go through a very basic example without the 9662 election and same numbers as we used previously. So you have an individual shareholder this time, obviously as opposed to a corporate shareholder, but 100% CFC ownership, tested income of $1 million. The foreign taxes they paid are $130,000 at 13% rate. Obviously this could be, we could be talking about a country, let's say the UK again at 25%, but due to carried forward losses, it's actually come down to 13%. So didn't qualify for the high tax exclusion and they're paying only $130,000 of taxes.

So let's just say they didn't make the Section 962 election. The default treatment would be as follows. The inclusion of the NCTI exclusion previously guilty would be $1 million. The Section 250 deduction, that's not relevant, that's not applicable here since that only applies when you make the Section 962 election. So you have taxable income of a million dollars and that flows through to the Form 1040 as other income and that would get you to taxes of up to obviously not a flat 37%, but up to 37%, which is the top bracket. And essentially what happens here is this lands in ... So this is technically foreign sourced income and it lands in its own special NCTI 1116 basket, but really don't have any taxes that you can use to offset this $370,000. So there's no real FTCs for you to take and you just hit with the full US taxation and really double taxation because you can't benefit from this $130,000 you've used.

And so yeah, this is obviously just showing you what the default treatment would be definitely as we're going to see as we go along would be better to make a 962 election in this event. And I think as Ayelet mentioned in the earlier slides, the OBBA changes did not affect the high tax exclusion itself. That is still exactly as it was before. So that's 90% of the US corporate tax rate of 21%. So as long as the foreign corporation is paying 18.9% or above of corporate taxes, then you can make the high tax exclusion. Below that, that's when we should look to make the Section 962 election.

Ayelet Duskis:
So Michael, if we're again asking that question of how impactful the changes are, if I'm an individual and I don't have a 962 election in there for whatever reason, the changes are less impactful. Whereas in the corporate side, we saw how massively impactful it was that a 962 election, it doesn't look that impactful over here. Is that right?

Michael Conrad:
Yes, agreed. So without the 962 election, obviously, like I said, you obviously would be looking to make it should you not then right, exactly is what it's showing over here in this big bold letter is $370,000. This is the same before and after. We will look at the fact that the Q by carve out has been eliminated, so that could be a small impact, I yell it. So if you were not going to make the 962 election, but you really were kind of asset heavy business, relying on the QB deduction, that has been eliminated. But for purposes of this example, we haven't considered that.

Okay. Now we're just going to look at exactly how it's changed with the 962 election now. Okay. Same as before, we have an individual owner of 100% CFC ownership, a million dollars of tested income and $130,000 of foreign taxes that pays up to 37% of taxes on the US individual return. So the NCTI, previously guilty inclusion is a million dollars. So just as we were showing before, without the section 962, you have $370,000, which can't really be eliminated by any foreign tax credits. And then pre the changes with the 962 election, you had a section 250 deduction made on form 8993, which you would attach to your election statement and to your individual return. So you'd have a $500,000 deduction of 50%, which would bring you down to $500,000 of taxable income and the US tax pre FTC would be 21% and the indirect FTC you're only qualified to take 80% of that would be $104,000 and that would bring you to, in this example, to net US tax of $1,000.

Now post the OBBA changes, we can see without the Section 962 election, just as we saw on the previous slide, it's exactly the same with the 90 Section 962 election. So that deduction is cut down to 40%, so it's $400,000, which then brings you to taxable income of 600,000. And then pre FTC, you've got $126,000 of US tax and then once you take that Section 250 deduction, which has been increased to 90%, you have a foreign tax credit of $117,000, which brings you to net US tax of $9,000. So just as we saw in the corporate example, because again, what the individual is doing is choosing to be taxed as a corporation, we have a ninefold increase due to the changes from $1,000 to $9,000. Fairly material. And obviously as the numbers get bigger, we can actually see that these changes can be quite impactful.

Any questions so far? Okay, so let's move on. Okay. So now we're going to just look at an example using the same numbers as before, but for an individual, so we have $1 million of tested income, but you have an individual who owns 20% of the CFC and then halfway through the year on July 1st he sells individual A, owning his 20%, sells his shares to individual B. So they essentially have almost a fifty fifty split of when they held their shares of the CFC. So whereas before the changes for the 2025 filings and earlier, which we're currently involved in doing for our clients, only the last date owner in this example would include their share of sub-RF or guilty income, which was now changed to NCTI. So as we can see here, seller A literally includes nothing and there's no US tax exposure here.

Whereas when you have the buyer, he has to include the full $200,000, which is the 20% of one million and he could be hit with tax of up to 37%.

And then once you have the changes for 2026 tax year and later, as we can see here, you have to do a prorated calculation. So 182 divided by 365. So it's almost 50% each and when they both get to kind of splitting around $100,000 each, which both gets to half of 74. So in this case, they're going to share their liability around $37,000 each. And then as we're going to see in the example later, when we're going to actually just revert back to an individual owning the four million, they still have the option to make a section 962 election here.

Okay, let's go on to the next slide. Okay. We're going to just look at how this is affected form by form, which is kind of quite similar to the couple of slides ago. So on the form 5471, you have the inclusion timing as we just mentioned, last day versus now any day pro rata by days held. If there's a mid-year sale, this means the seller now includes a pro rata NCTI share, not just the buyer. As we mentioned before, the section 898C was repealed. That doesn't usually affect individual taxpayers. And then you have the form 8992, the NCTI guilty computation with the optional section 962 election.

So as we know, guilty was changed to net CFC tested income without the Section 962 election, you have full inclusion at marginal rates of up to 37% and there's no Section 250 deduction without the 962 election. Within the Section 962 election, you have a rate of 21% with a Section 250 deduction made on the form 8993 of 40%, that brings you to a 12.6% effective rate with the Section 962 election. As we mentioned before, should you not make the 962 election, it would land into 1116 basket just as I did before its own guilty NCTI basket where you can't really take any foreign tax credits against it.

So with the Section 962 election on the Form 1118, the disallowance has been cut from 20% to 10%. So you have another 90% eligible and yeah, that then flows through to Form 1118 and then after that it would hit the Form 1040. So without the Section 962 election, the guilty NCTI inclusion would land on schedule one. I think I put line 8Z, that's a typo. I think it's around something like line 80 for the 2025 return and that would be taxed up to 37%. With the section 962 election, it's not included on schedule one. You attach the relevant forms, the election form 1118, 8993, and your company calculations and you then put the whatever the outcome is, what your actual tax calculation after all the 962 deductions and indirect foreign tax credits and that then lines on the tax line of the 1040 itself.

Okay. How does it look on the actual forms? So on the form 5471, Schedule I, here you have the similar example to the same way you looked on the corporate example earlier, $1.3 million of gross income and then you have your exclusions, effectively connected income, sub part F, high tax exception, related party dividends, foreign oil and gas extraction income and then you have total exclusions of $300,000, which brings you to tested income of one million. And then you have tested foreign income taxes of $130,000 and here's where we see the changes, whereas previously you were able to take a Q by deduction and this example $500,000 ... Yeah, $500,000, which is the actual asset. These are no longer relevant. So if we go down here, whereas previously with the Q by 10% deduction, you were able to knock off $50,000 due to the changes from 2026 onwards, this is no longer allowed.

So previously we had a $950,000 exclusion. Here we have a $1 million exclusion. Okay.

I'm just going to look at some of the questions that have been written. With the Section 962 election, does everyone get indirect FTC benefit? Assume Corp has income that had previous year losses. So yeah, everyone gets whatever foreign taxes were actually paid in that specific year with the Section 962 election, you do get that benefit, yes. However, with the losses, that could be quite low, but it would still be beneficial in terms of getting that Section 250 deduction and bringing your effective rate down. Obviously, you could compare that against what it would look like in terms of not making the election and just including that income, if their marginal tax rates are quite low, maybe it could be more beneficial not to make the election, but in most cases it would be. Okay. We have another question here. If a US person buys from a non-US person, does the any day pro rata share still come into effect or does the US person who buys need to do that whole year like previously?

That's a good question. Ayelet, do you have an idea?

Ayelet Duskis:
Quick question and I was trying to see if I knew the answer. I'm looking up at the code, so why don't you keep going and I will look it up. Yeah. Okay.

Michael Conrad:
We'll come back to that. That's a good question. Okay. So here, I mean, I haven't shown you the actual forms themselves. I just thog be more beneficial, easier this way to kind of reflect the changes. But as I said, here you are choosing to be taxed as a corporation. So the form 8992893 do look very similar to the corporate example. So you could just scroll back to those slides to look at how these forms actually appear. Okay. Again, the example is an individual owns 100% of the CFC. The $4 million is NCTI. As we said, the OBBA removes the QB carve out and cuts section 250 rate from 50 to 40%. Okay. Pre BBBA, I think just for this example, we're going to forget that there was ever any sort of QBI assets. So let's just assume there were no QBI assets here. So the $1 million before and after it's the same NCTI exclusion with the section 962 election and you therefore attach form 8993 to make that deduction whereas before it was 50% at $500,000 it's now been decreased to 40% so you get $400,000.

So you have taxable income of $500,000 previously, whereas now you have taxable income of $600,000. So the section 962 tax at the US corporate rates of 21% previously would've been $15,000. Now it's gone up to $126,000 and then it's just mentioning here obviously without the Section 962 election, there's no Section 250 deduction. The full amount is tax, which is why I said before in most cases it's beneficial when you don't qualify for the high tax exclusion to make this election.

Yeah, I think someone's asking what's the downside of making the election. Again, if you qualify for the high tax exclusion, then you're just putting in a lot of extra work unnecessarily because the high tax exclusion is very straightforward. You literally just show on the Schedule I, I'll just go back to it here. On this line over here, I think on this form it would be line 2C. Yeah, 2C, you would just put your entire NCTI, all the gross income on that line and exclude all the income and that's literally the end of the story. There's not much else to be done besides maybe formally making the election itself by attaching a statement to the return. So yeah, just in terms of unnecessary work and maybe additional costs to your client. And then like I said earlier, if your marginal tax rates are really low, your AGI is very low and actually maybe including the guilty income would come out to less than 12.6%, then it wouldn't make sense.

So you can run these numbers every year by year. Again, the election is not fixed. You can change it year by year on your client's tax returns

Ayelet Duskis:
With the 962, you have to also remember that there's no PTEP with whatever income inclusion you end up with in the 962, aside for the amount of taxes that you actually pay. So there's always planning depending on, again, if you do a 962 election, when you take a distribution, it's taxable. It's not a PTEP. So again, everything is always dependent on the countries and how much more tax credits you have and this and that, but that's also one piece that would maybe make the 962 yes and it's correct that if there's high tax election, you also don't have PTEP, but it's possible with a 962 election to have an income inclusion, whereas if with a high tax exception, you wouldn't have an income inclusion at all. So just again, pieces to keep in mind when you're doing things, everybody's story, what countries are involved, all of that's going to be different, but that is another spot where the 962 could be less beneficial.

Michael Conrad:
Thank you, Ayelet. Yes, good point. Okay. Yeah. And then once you have prepared the form 8992 and 8993, should you make the election, you then move on to 1116, like I was saying before, it kind of just lands in that basket to distinguish it from other foreign sourced income so that you can't offset NCTI previously guilty income by other passive general limitation foreign tax credit. So it's isolated in its own basket and doesn't really have any foreign taxes to offset it. And then should you make the 962 election, you would have to attach the Form 1118 So previously again, this is just showing what the foreign corporate taxes actually paid were, which were $130,000 in this example. So previously you were disallowed 20% of this 130,000, so only 80% was allowed and that would bring you to foreign tax credits of $104,000, whereas now you actually allowed 90%, only 10% has been disallowed.

So you can take of this $130,000, you can take $117,000 and then we land on the 1040 itself. So without the Section 962 election, you would have tax of ... So you would include that income on schedule one, line eight, you would include the $4 million and that would produce tax of up to $370,000 and that's the same before and after. With the Section 962 election, previously you had tax of $105,000, 962 tax, whereas it's been increased now to 126. Then once you take the foreign tax credits, previously it was $104,000, whereas now it's increased to $117,000. So then the net 962 US tax, previously it was $1,000. It's now increased ninefold to $9,000 and that income is that amount is input directly on the 1040 tax line with all your accompanying forms that I've just mentioned, the 8992, the 8993, the 1118 and the election statement, those are all attached to your tax return and you just show the final figure on the 1040.

Any questions? Did you manage to find an answer to the previous one?

Ayelet Duskis:
Yeah. So I believe I read the code and I also asked the Copilot what they thought about the code, but yeah, so it looks like that now that there's the language of any of your pro rata share, which wasn't necessarily there before, like that would be any day language in there. We're always looking at it whether it's buying from a US person or not a US person as long as now that the any day language is there, that's how it's being calculated based on the pro rata share any day language versus at the year end, which makes sense to me.

Michael Conrad:
Yeah, that makes sense. Okay. So now we're going to go to the next slide. Okay. Poll nine, [Poll #9] We'll just wait a minute until you were to think about this and giving your answers. And there is one more polling question after this. I think someone was asking before how many are left. So I think this is the second to last one.

Ayelet Duskis:
When you get this answer one done, you can just move on to the next one and maybe I'll do a litle summary while you do that. Yeah.

Michael Conrad:
Okay. We'll just wait another five or 10 seconds and then we'll move on. Still nine of you to go. Okay. So the answer was 14%. 14% is the new post OBBA threshold, breakeven threshold. Okay, that's the magic number which we need to look for once you get your client's financial statements, you want to calculate, okay, after any deductions, any losses, which the US is not going to consider what is the effective foreign corporate taxes that were paid, you want to look to this magic number here, 14%. Okay. Yeah, you said I should go into the next polling question now

Ayelet Duskis:
Since we only really have a minute left.

Michael Conrad:
Yeah, yeah, yeah. Okay. And so here's the last one. [Poll #10]. So this is the last question, everyone.

Ayelet Duskis:
While everyone is answering this, I'll just summarize a little. So I asked you guys in the beginning, how impactful did you feel that these rules were? Again, when you're just reading the law, which I find interesting because I was preparing the laws and my team was preparing the numbers and when you're just hearing the laws, maybe they doesn't sound as impactful. It's not so huge. But when you're looking at the numbers, we saw some big changes. We saw the swing for one million dollars of income. We saw a swing of $8,000 or so of taxes or the numbers were impactful. I'm not sure that that downward attribution stuff really was that impactful, but definitely the changes to NCTI, it makes a difference. And so now hopefully we all understand it a little better and we're going to spend the next few months as we're getting through the end of the 2025 filing season thinking about and planning how to make sure that nobody gets caught in the crosshairs of something that maybe they weren't in before.

And with that, I'm going to wish you guys all a excellent day. I'm going to let ... We'll wait one more second with the CP and then we'll push it over. Great day. Thank you for listening. And as always, I'm the nerd that loves this stuff, so feel free to reach out with questions. Happy to talk about it. Yes, that's Maya when I talk about it.

Huge, huge thank you to Michael and Matt for really walking us through how the changes are going to play out on our tax returns. I think we'll switch this to the next one. All right. So people are aware, but they've got a lot of learning to do. And with that, we're done. So wishing everybody a great day.

Michael Conrad:
Thanks everyone. Have a great day.

Matt Weiser:
Thank you.

_{Transcribed by Rev.com AI}