SHOP THE WINTER SALE – Get deals across the digital catalog, conferences, credit packages, and more.
On December 4, the IRS released Notices 2025-75, 2025-77, and 2025-78 addressing international tax changes from the One Big Beautiful Bill Act (OBBBA). These notices tackle dividend treatment during a transition period, foreign tax credit calculations for previously taxed earnings, and exclusions from deduction eligible income. For tax professionals advising multinational clients, understanding the guidance from these notices will be essential for assisting your clients.
Notice 2025-75 addresses Section 951(a)(2)(B), which traditionally reduces a U.S. shareholder’s pro rata share of a controlled foreign corporation (CFC) subpart F income or tested income when stock changes hands mid-year. This notice establishes a transition rule that certain dividends are not treated as dividends for Section 951(a)(2)(B) purposes if they “do not increase the taxable income of a United States person subject to Federal income tax.” Dividends meeting this test include:
When a lower-tier CFC pays a dividend to an upper-tier CFC, the dividend is treated as increasing taxable income to the extent it would create a Section 951(a)(1)(A) or Section 951A(a) inclusion for a U.S. shareholder of the upper-tier CFC. The transition rule covers dividends paid on or before June 28, 2025 (where the acquiring shareholder didn’t own the stock on or before that date), or after June 28, 2025 but before the CFC’s first tax year beginning after December 31, 2025.
For partnerships and S corporations, the notice implements a “look-through rule”—the determination occurs at the partner or shareholder level, not the entity level. U.S. shareholders claiming Section 951(a)(2)(B) reductions must attach a statement to Form 5471 documenting why the dividend qualifies. Comments are due February 2, 2026.
ARTICLE CONTINUES BELOW
Notice 2025-77 implements Section 960(d)(4), which disallows a foreign tax credit for 10% of foreign income taxes paid or accrued with respect to distributions of previously taxed earnings and profits from Section 951A inclusions. The disallowance applies only when the previously taxed earnings and profits (PTEP) results from a Section 951A inclusion in a U.S. shareholder’s taxable year ending after June 28, 2025.
This represents a two-part change to the foreign tax credit rules. Prior to OBBBA, Section 960(d)(1) reduced deemed-paid foreign taxes by 20%. OBBBA reduced this to 10%, and the new Section 960(d)(4) adds an additional 10% disallowance specifically for PTEP distributions from GILTI inclusions.
One key detail: The date for determining whether the 10% disallowance applies is the U.S. shareholder’s taxable year end, not the CFC’s taxable year end. A shareholder with a December 31, 2025 year end will have Section 951A inclusions subject to the new rule, even if the underlying tested income was earned by a CFC with a May 31, 2025 year end.
The notice creates two PTEP categories:
When a CFC distributes, foreign taxes are allocated proportionally between these groups. The 10% disallowance applies only to taxes allocated to post-06/28/25 PTEP. The notice doesn’t include a comment period, and taxpayers may rely on its guidance immediately.
Notice 2025-78 addresses Section 250(b)(3)(A)(i)(VII), which excludes certain income and gain from deduction eligible income calculations.
The exclusion covers:
Property held as inventory doesn’t qualify as “other excluded property” because inventory isn’t subject to depreciation allowances. The notice clarifies that “sale or other disposition” includes deemed sales and Section 367(d) transactions, but not leases or licenses.
However, if a seller acquires property that was “other excluded property” in a related party’s hands, in a carryover basis transaction with a principal purpose of avoiding the exclusion, the property remains “other excluded property” for the seller. The effective date is June 16, 2025, and comments are due February 2, 2026.
A U.S. shareholder acquiring CFC stock in 2025 must simultaneously determine whether prior dividends reduce its inclusion under Notice 2025-75’s transition rule while tracking whether distributions come from pre- or post-June 28 PTEP pools under Notice 2025-77 for foreign tax credit purposes.
Taxpayers may rely on all three notices until proposed regulations are published, provided they apply the rules consistently. The February 2, 2026 comment deadline for Notices 2025-75 and 2025-78 represents an opportunity to raise technical questions or highlight practical compliance challenges. Understanding what these notices establish—and what they don’t—is the foundation for accurate compliance through this transition period.
Subscribe to our news, analysis, and updates to receive 10% off your first purchase of an on-demand digital CPE course.
