The Tax Times: The Year-End CFC Sale Loophole Just Closed

On August 25, 2026, the U.S. Treasury Department and the IRS released long-awaited proposed regulations (REG-115646-25) implementing sweeping changes that the 2025 budget reconciliation bill—commonly known as the One Big Beautiful Bill Act (OBBBA)—made to the decades-old Subpart F regime. For any client who owns, is selling, is buying, or is restructuring an interest in a controlled foreign corporation (CFC)—a foreign corporation more than 50% owned by U.S. shareholders—this guidance fundamentally changes how and when foreign-earnings tax bills land, and it closes a planning technique that international families and cross-border business owners have relied on for years.

For decades, whether a U.S. shareholder had to include Subpart F income (and, more recently, GILTI-style "net CFC tested income," or NCTI) in taxable income turned on a single moment: did you own the CFC stock on the last day of the corporation's tax year? If you sold your interest even one day before year-end, you generally escaped the inclusion entirely, and the buyer inherited it instead. This "last day" rule created a well-worn planning opportunity around year-end sales, gifts, and restructurings of foreign holding companies.

OBBBA eliminates that rule for tax years of foreign corporations beginning after December 31, 2025. Under revised section 951(a), a U.S. shareholder who owns CFC stock on any day during the year must pick up its pro rata share of Subpart F income and NCTI—prorated daily for the actual number of days the stock was held while the company was a CFC and the owner was a U.S. shareholder. The new proposed regulations flesh out exactly how that daily proration works, including separate calculations for shares issued or redeemed mid-year and a weighted-average-share methodology when the share count itself changes.

Two related mechanics matter for deal timing. First, a CFC's tax year must now close automatically whenever the company becomes or ceases to be a CFC mid-year (a "status change event"), so a sale that flips control doesn't just get prorated—it can trigger a hard split of the tax year. Second, in ownership shifts among unrelated parties that cause a swing of more than 50 percentage points in ownership—the kind of shift typical in many M&A and family succession transactions—the shareholders may jointly elect to close the CFC's tax year early, provided they enter into a written binding agreement and each attaches an "Elective Section 951 Year-Closing Statement" to their return.

Critically, the "last day" rule survives for one purpose: Section 956 inclusions on investments in U.S. property still turn on ownership as of the last day of the CFC's tax year, so that particular exposure has not gone away for clients using foreign corporations to hold or guarantee U.S. assets. And the proposed regulations pair this new daily-proration regime with a transition rule addressing dividends paid between June 28, 2025 (when OBBBA was enacted) and the CFC's first post-2025 tax year—these dividends generally will not reduce a shareholder's Subpart F pro rata share unless they actually increased a U.S. person's taxable income, which matters for any client who tried to distribute earnings out of a CFC during that window to get ahead of the new rules.

For high-net-worth and international clients, this is not an academic change. Anyone contemplating a sale, gift, trust distribution, or restructuring involving CFC stock now needs to model the tax consequences based on the exact closing date and daily ownership count, not just year-end position. Form 5471 reporting is also expanding to require detailed, date-stamped tracking of every change in share ownership and outstanding stock.

Three things to put in motion now: Start tracking CFC ownership changes on a daily basis going forward, since the calendar-year snapshot approach no longer works. Review any dividends paid or ownership shifts between June 28, 2025 and your CFC's first 2026 tax year to see whether the transition rule documentation needs to go on Form 5471. Build the mandatory- and elective-closing analysis into the timeline of any pending or contemplated sale, gift, or restructuring of foreign corporation stock, since the election requires a written agreement among shareholders and a timely filed statement.

The bottom line for cross-border families and business owners: the days of timing a CFC sale to land just before year-end and walk away clean are over. Every day of ownership now has tax consequences, and deal structuring, gifting, and succession planning involving foreign corporations need to build daily proration, potential year-closings, and the new documentation requirements into the timeline from the outset. Comments on the proposed regulations are due October 26, 2026, and Treasury has indicated it intends to finalize them by January 4, 2027—but taxpayers may rely on the rules now, provided they and their related parties follow them in full.

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