The Tax Times: New IRS FCFC Rules: How IR-2026-03 Transforms 951B and Net CFC Tested Income

Treasury and the IRS used IR‑2026‑03 to roll out proposed regulations that overhaul how “foreign controlled foreign corporations” and “Net CFC Tested Income” work under the One, Big, Beautiful Bill Act, with big implications for U.S. owners of foreign entities starting in 2025–2026.

What IR-2026-03 does

IR‑2026‑03 announces proposed regulations implementing the new statutory framework for foreign controlled foreign corporations (FCFCs) and Net CFC Tested Income (NCTI) created by the One, Big, Beautiful Bill Act (OBBBA). The package is aimed at aligning Subpart F–style anti‑deferral rules with the 2025 legislative changes while narrowing some of the over‑breadth produced by prior attribution and GILTI regimes.

At a high level, the proposed rules translate the statute into mechanics: who is treated as a U.S. shareholder under the new regime, when a foreign corporation is an FCFC, and how NCTI inclusions are computed, allocated and reported. This is the guidance multinational groups and cross‑border closely held structures have been waiting for to model 2026 and later effective dates.

Key concepts: FCFCs and NCTI

The One, Big, Beautiful Bill Act introduced a new FCFC category to capture foreign corporations that are effectively controlled by U.S. persons through downward attribution from foreign parents or intermediaries. IR‑2026‑03’s proposed regulations define control thresholds, aggregation rules and safe harbors to distinguish targeted foreign‑parented structures from ordinary portfolio holdings.

On the income side, the Act rebrands and refines GILTI as Net CFC Tested Income, with new computational rules and interaction with foreign tax credits. The proposed regulations flesh out how to determine NCTI, allocate it among U.S. shareholders, coordinate it with existing Subpart F categories and apply new limitation rules added by OBBBA.

Effective dates and transition

Most of the OBBBA international provisions, including the FCFC and NCTI framework that IR‑2026‑03 addresses, are effective for tax years beginning after December 31, 2025. The proposed regulations generally follow those statutory effective dates but include limited transition relief and reliance rules, allowing taxpayers to adopt reasonable interpretations pending finalization.

For calendar‑year taxpayers, that means the new regime is live starting with the 2026 tax year, and modeling needs to begin now, even while rules are still technically in proposed form. The preamble also invites comments on several key definitional and computational issues, giving taxpayers a window to influence final guidance before it locks in.

Practical planning implications

For multinational groups with foreign‑parented structures, the FCFC rules will require a fresh look at ownership chains, voting and value, and prior reliance on the absence of CFC status. Structures that escaped Subpart F and GILTI purely because of foreign control may now generate NCTI inclusions and expanded information reporting for U.S. minority stakeholders.

U.S.‑parented groups face a different challenge: integrating the new NCTI computational rules with existing foreign tax credit planning, entity classification, and supply‑chain restructuring driven by the One, Big, Beautiful Bill’s broader rate and deduction changes.

For closely held clients, the message is simple but urgent: inventory all foreign entities, map constructive ownership under the new rules, and start “what‑if” modeling of NCTI now, rather than waiting for the first 2026 extension season.

Have an International IRS Tax Problem?