Reg. § 1.958-1 Direct and indirect ownership of stock.
(a) In general Section provides that, for purposes of sections to 964 (other than sections and (B) and 955(c)(2)(A)(ii) (as in effect before the enactment of the Tax Reduction Act of 1975), and 960(a)(1)), stock owned means—
(1) Stock owned directly; and
(2) Stock owned with the application of of this section.
The rules of section and this section provide a limited form of stock attribution primarily for use in determining the amount taxable to a United States shareholder under section . These rules also apply for purposes of other provisions of the Code and regulations which make express reference to section .
(b) Stock ownership through foreign entities For purposes of of this section, stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, foreign trust (within the meaning of section ) described in sections through , or other foreign trust or foreign estate (within the meaning of section ) shall be considered as being owned proportionately by its shareholders, partners, grantors or other persons treated as owners under sections through of any portion of the trust that includes the stock, or beneficiaries, respectively. Stock considered to be owned by reason of the application of this paragraph shall, for purposes of reapplying this paragraph, be treated as actually owned by such person. Thus, this rule creates a chain of ownership; however, since the rule applies only to stock owned by a foreign entity, attribution under the rule stops with the first United States person in the chain of ownership running from the foreign entity. The application of this paragraph may be illustrated by the following example:
Example. Domestic corporation M owns 75 percent of the one class of stock in foreign corporation R, which in turn owns 80 percent of the one class of stock in foreign corporation S, which in turn owns 90 percent of the one class of stock in foreign corporation T. Under this paragraph, R Corporation is considered as owning 80 percent of the 90 percent of the stock which S Corporation owns in T Corporation, or 72 percent. Corporation M is considered as owning 75 percent of such 72 percent of the stock in T Corporation, or 54 percent. Since M Corporation is a domestic corporation, the attribution under this paragraph stops with M Corporation, even though, illustratively, such corporation is wholly owned by domestic corporation N.
(c) Rules of application
(1) Special rule for mutual insurance companies For purposes of applying of this section in the case of a foreign mutual insurance company, the term “stock” shall include any certificate entitling the holder to voting power in the corporation.
(2) Amount of interest in foreign corporation, foreign partnership, foreign trust, or foreign estate The determination of a person's proportionate interest in a foreign corporation, foreign partnership, foreign trust, or foreign estate will be made on the basis of all the facts and circumstances in each case. Generally, in determining a person's proportionate interest in a foreign corporation, the purpose for which the rules of section and this section are being applied will be taken into account. Thus, if the rules of section are being applied to determine the amount of stock owned for purposes of section , a person's proportionate interest in a foreign corporation will generally be determined with reference to such person's interest in the income of such corporation. If the rules of section are being applied to determine the amount of voting power owned for purposes of section or , a person's proportionate interest in a foreign corporation will generally be determined with reference to the amount of voting power in such corporation owned by such person. However, any arrangement which artificially decreases a United States person's proportionate interest will not be recognized. See and .
(d) Stock of foreign corporations owned through domestic partnerships
(1) In general Except as otherwise provided in of this section, for purposes of sections , , and , and for purposes of any provision that specifically applies by reference to any of such sections or the regulations in this part under section , , or (but only as the regulations in this part under section relate to section ), a domestic partnership is not treated as owning stock of a foreign corporation within the meaning of section . For purposes of determining the persons that own stock of the foreign corporation within the meaning of section when the preceding sentence applies, stock of a foreign corporation owned by a domestic partnership is treated in the same manner as stock of a foreign corporation owned by a foreign partnership under section and of this section.
(2) Non-application for certain purposes of this section does not apply for purposes of—
(i) Determining whether any United States person is a United States shareholder (as defined in section );
(ii) Determining whether any foreign corporation is a controlled foreign corporation (CFC) (as defined in section );
(iii) Applying section and (d);
(iv) Applying section ; or
(v) Determining whether any United States shareholder is a controlling domestic shareholder (as defined in ).
(3) Examples The following examples illustrate the application of this .
(i) Example 1
(A) Facts USP, a domestic corporation, and Individual A, a United States citizen unrelated to USP, own 95% and 5%, respectively, of PRS, a domestic partnership. PRS owns 100% of the single class of stock of FC, a foreign corporation.
(B) Analysis
(1) United States shareholder and CFC determinations Under and of this section, respectively, the determination of whether PRS, USP, and Individual A (each a United States person) are United States shareholders of FC, and whether FC is a controlled foreign corporation, is made without regard to of this section. PRS, a United States person, owns 100% of the total combined voting power or value of the FC stock within the meaning of section . Accordingly, PRS is a United States shareholder under section , and FC is a controlled foreign corporation under section . USP is also a United States shareholder of FC because it owns 95% of the total combined voting power or value of the FC stock under sections and . Individual A, however, is not a United States shareholder of FC because Individual A owns only 5% of the total combined voting power or value of the FC stock under sections and .
(2) Application of sections 951 and 951A Under of this section, for purposes of sections and , PRS is not treated as owning (within the meaning of section ) the FC stock; instead, for purposes of determining the persons that own the FC stock within the meaning of section , the FC stock is treated as if it were owned by a foreign partnership under of this section. Therefore, for purposes of sections and , USP is treated as owning 95% of the FC stock under section , and Individual A is treated as owning 5% of the FC stock under section . USP is a United States shareholder of FC, and therefore USP determines its income inclusions under sections and directly with respect to FC based on its ownership of FC stock under section . However, because Individual A is not a United States shareholder of FC, Individual A does not have an income inclusion under section with respect to FC or a pro rata share of any amount of FC for purposes of section . This is the case even though PRS is a United States shareholder of FC.
(ii) Example 2
(A) Facts USP, a domestic corporation, and Individual A, a United States citizen, own 90% and 10%, respectively, of PRS1, a domestic partnership. PRS1 and Individual B, a nonresident alien individual, own 90% and 10%, respectively, of PRS2, a domestic partnership. PRS2 owns 100% of the single class of stock of FC, a foreign corporation. USP, Individual A, and Individual B are unrelated to each other.
(B) Analysis
(1) United States shareholder and CFC determinations Under and of this section, the determination of whether PRS1, PRS2, USP, and Individual A (each a United States person) are United States shareholders of FC, and whether FC is a controlled foreign corporation, is made without regard to of this section. PRS2 owns 100% of the total combined voting power or value of the FC stock within the meaning of section . Accordingly, PRS2 is a United States shareholder under section , and FC is a controlled foreign corporation under section . Under sections and , PRS1 is treated as owning 90% of the FC stock owned by PRS2. Accordingly, PRS1 is also a United States shareholder under section . Further, under section , PRS1 is treated as owning 100% of the FC stock for purposes of determining the FC stock treated as owned by USP and Individual A under section . Therefore, USP is treated as owning 90% of the FC stock under section (100% × 100% × 90%), and Individual A is treated as owning 10% of the FC stock under section (100% × 100% × 10%). Accordingly, both USP and Individual A are also United States shareholders of FC under section .
(2) Application of sections 951 and 951A Under of this section, for purposes of sections and , PRS1 and PRS2 are not treated as owning (within the meaning of section ) the FC stock; instead, for purposes of determining the persons that own the FC stock within the meaning of section , as the FC stock is treated as if it were owned by foreign partnerships under of this section. Therefore, for purposes of determining the amount included in gross income under sections and , under section USP is treated as owning 81% (100% × 90% × 90%) of the FC stock, and Individual A is treated as owning 9% (100% × 90% × 10%) of the FC stock. Because USP and Individual A are both United States shareholders of FC, USP and Individual A determine their respective inclusions under sections and directly with respect to FC based on their ownership of FC stock under section . This is the case even though PRS2 is a United States shareholder of FC.
(iii) Example 3
(A) Facts Individual A, a United States citizen, Individual B, a United States citizen unrelated to Individual A, and Individual C, a foreign person unrelated to both Individuals A and B, own 10%, 5%, and 85%, respectively, of PRS, a domestic partnership. PRS owns 100% of the single class of stock of FC, a foreign corporation. FC holds an account receivable from PRS that constitutes an obligation of a United States person within the meaning of section and .
(B) Analysis
(1) United States shareholder and CFC determinations Under and of this section, respectively, the determination of whether PRS, Individual A, and Individual B (each a United States person) are United States shareholders of FC, and whether FC is a controlled foreign corporation, is made without regard to of this section. PRS, a United States person, owns 100% of the total combined voting power or value of the FC stock within the meaning of section . Accordingly, PRS is a United States shareholder under section , and FC is a controlled foreign corporation under section . Individual A is also a United States shareholder of FC because it owns 10% of the total combined voting power or value of the FC stock under sections and . Individual B, however, is not a United States shareholder of FC because Individual B owns only 5% of the total combined voting power or value of the FC stock under sections and .
(2) Application of section 956(a) Under of this section, for purposes of section , PRS is not treated as owning (within the meaning of section ) the FC stock; instead, for purposes of determining the persons that own the FC stock within the meaning of section , as the FC stock is treated as if it were owned by a foreign partnership under of this section. Therefore, for purposes of section , under section Individual A is treated as owning 10% of the FC stock, and Individual B is treated as owning 5% of the FC stock. Individual A is a United States shareholder of FC, and therefore Individual A determines the amount it must include in gross income under section by reason of the PRS obligation held by FC based on its ownership of FC stock under section as determined under of this section. However, because Individual B is not a United States shareholder of FC, Individual B does not have an amount to include in income under sections and .
(3) Application of section 956(c) and (d) Under of this section, for purposes of section and (d), the determination of whether FC holds United States property is made without regard to of this section. Therefore, PRS is treated as owning stock of FC within the meaning of section for purposes of determining the amount of United States property held by FC arising from its account receivable from PRS.
(4) Applicability dates
(i) Paragraphs (d)(1) through (3) of this section through of this section apply to taxable years of foreign corporations beginning on or after January 25, 2022, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end. For taxable years of a foreign corporation that precede the taxable years described in the preceding sentence, a domestic partnership may apply through of this section in their entirety to taxable years of a foreign corporation beginning after December 31, 2017, and to taxable years of the domestic partnership in which or with which such taxable years of the foreign corporation end, provided that the partnership, its partners that are United States shareholders of the foreign corporation, and other domestic partnerships that bear relationships described in section or to the partnership (and their United States shareholder partners) consistently apply through of this section with respect to all foreign corporations whose stock the domestic partnerships own within the meaning of section (determined without regard to of this section).
(ii) Rules applicable before January 25, 2022 For taxable years of foreign corporations beginning before January 25, 2022, and to taxable years of United States persons in which or with which such taxable years of foreign corporations end, see and as in effect and contained in 26 CFR part 1, as revised April 1, 2021.
(e) [Reserved]
(f) Illustration The application of this section may be illustrated by the following examples:
Example 1. United States persons A and B own 25 percent and 50 percent, respectively, of the one class of stock in foreign corporation M. Corporation M owns 80 percent of the one class of stock in foreign corporation N, and N Corporation owns 60 percent of the one class of stock in foreign corporation P. Under of this section, M Corporation is considered to own 48 percent (80 percent of 60 percent) of the stock in P Corporation; such 48 percent is treated as actually owned by M Corporation for the purpose of again applying of this section. Thus, A and B are considered to own 12 percent (25 percent of 48 percent) and 24 percent (50 percent of 48 percent), respectively, of the stock in P Corporation.
Example 2. United States person C is a 60-percent partner in foreign partnership X. Partnership X owns 40 percent of the one class of stock in foreign corporation Q. Corporation Q is a 50-percent partner in foreign partnership Y, and partnership Y owns 100 percent of the one class of stock in foreign corporation R. By the application of of this section, C is considered to own 12 percent (60 percent of 40 percent of 50 percent of 100 percent) of the stock in R Corporation.
Example 3. Foreign trust Z was created for the benefit of United States persons D, E, and F. Under the terms of the trust instrument, the trust income is required to be divided into three equal shares. Each beneficiary's share of the income may either be accumulated for him or distributed to him in the discretion of the trustee. In 1970, the trust is to terminate and there is to be paid over to each beneficiary the accumulated income applicable to his share and one-third of the corpus. The corpus of trust Z is composed of 90 percent of the one class of stock in foreign corporation S. By the application of this section, each of D, E, and F is considered to own 30 percent (1⁄3 of 90 percent) of the stock in S Corporation.
Example 4. Among the assets of foreign estate W are Blackacre and a block of stock, consisting of 75 percent of the one class of stock of foreign corporation T. Under the terms of the will governing estate W, Blackacre is left to G, a nonresident alien, for life, remainder to H, a nonresident alien, and the block of stock is left to United States person K. By the application of this section, K is considered to own the 75 percent of the stock of T Corporation, and G and H are not considered to own any of such stock.
[T.D. 6889, 31 FR 9455, July 12, 1966, as amended by T.D. 7893, 48 FR 22509, May 19, 1983; T.D. 8955, 66 FR 37897, July 20, 2001; T.D. 9960, 87 FR 3654, Jan. 25, 2022; 87 FR 9445, Feb. 22, 2022]