U.S. shareholders of foreign corporations Notice 2025-72
The IRS has released Notice 2025-72, and it brings important changes for U.S. taxpayers who own interests in controlled foreign corporations. The notice rolls out guidance tied to the repeal of the long-standing one-month deferral election under §898(c)(2) and previews upcoming regulations on how foreign income taxes will be allocated when a foreign corporation’s taxable year must shift. It also outlines forthcoming amendments to the rules under §987 on recognizing foreign currency gain or loss from qualified business units.
While the subject matter is technical, the stakes are practical. The repeal affects how and when a foreign corporation closes its books, how its income is reported by U.S. shareholders, and how foreign taxes are treated for Subpart F and global intangible low taxed income (GILTI) purposes. The notice gives taxpayers a roadmap for navigating that shift.
End of the one-month deferral election
For decades, §898(c)(2) allowed certain foreign corporations to elect to begin their taxable year one month earlier than their majority U.S. shareholder’s taxable year. This one-month deferral gave flexibility in aligning financial reporting and tax compliance.
Congress ended that option through §70352 of the One Big Beautiful Bill Act (OBBBA). Under Notice 2025-72, the repeal applies to taxable years of specified foreign corporations beginning after Nov. 30, 2025. Once the repeal takes effect, a foreign corporation must adopt the same taxable year as its majority U.S. shareholder under §898(c)(1).
If a corporation previously used the one-month deferral, the repeal creates a short taxable year, often a one-month period between Dec. 1 and the date that aligns with the shareholder’s year-end. The notice confirms that this required year change is treated as initiated with the secretary’s consent, easing the procedural burden.
Why the change matters
The first required year after the repeal may contain only one month of income, but it may also include a full year's worth of foreign taxes if the foreign jurisdiction’s taxable year closes inside that period. Because Subpart F income under §951 and tested income for GILTI under §951A must be calculated using deductions (including taxes) allocated to those income categories, a mismatch between income and foreign tax can distort results.
The IRS recognizes this problem. Notice 2025-72 lays the foundation for proposed regulations that will allocate foreign income taxes between the short year and the following full year. This allocation is essential to keep foreign tax credits, Subpart F inclusions and GILTI calculations aligned with economic reality.
What U.S. shareholders must continue to include in income
The notice reiterates the fundamental rule for U.S. shareholders of a controlled foreign corporation. A U.S. shareholder must include:
- Its share of the CFC’s Subpart F income under §951
- Its global intangible low-taxed income under §951A
Both Subpart F and GILTI depend on the CFC’s underlying income. And for GILTI, the inclusion is based on the shareholder’s share of all tested income and tested loss from all CFCs it owns. These amounts are computed in the CFC’s functional currency and translated into U.S. dollars using the average exchange rate another detail that matters when exposure crosses multiple taxable years.
How foreign taxes will be allocated
The central feature of the notice is its framework for allocating “specified foreign income taxes.” These are foreign net income taxes that accrue in the short-required year and for which the CFC is the taxpayer.
The IRS sets out an ordering rule:
- Determine the total foreign income tax for the period.
- Apply the allocation rules under §1.861-20 to divide the taxes among the proper income groups, such as general income or foreign base company income.
- Allocate the taxes between the short year and the succeeding year using an allocation percentage based on the portion of foreign taxable income attributable to each period.
- Taxes assigned to previously taxed earnings and profits (PTEP) groups flow entirely to the short year.
Once allocated, the portion of foreign income tax assigned to each year is treated as accruing in that year for purposes of Subpart F, GILTI and §960 deemed-paid foreign tax credit rules. For purposes of §986(a) and §905(c) redeterminations, however, the tax continues to accrue in the short-required year.
The result is a cleaner alignment of income and taxes so U.S. shareholders avoid distortions that would otherwise arise from the statutory change.
Updates to the §987 foreign currency regulations
The notice also previews amendments to the §987 regulations, which govern how taxpayers recognize foreign currency gain or loss from qualified business units with non-U.S. functional currencies.
Taxpayers who elected to recognize pretransition §987 gain or loss ratably under the existing ten-year transition rule will see that timeline adjusted to accommodate short taxable years caused by the repeal of §898(c)(2). The IRS intends to permit recognition over 120 months instead of 10 taxable years, ensuring that short periods do not accelerate income recognition.
When the rules apply
Taxpayers may rely on the foreign tax allocation rules in Notice 2025-72 for taxable years of specified foreign corporations beginning after Nov. 30, 2025, and before proposed regulations are issued, so long as they apply the rules consistently. The §987 guidance may be relied upon for taxable years beginning after Dec. 31, 2024, and ending on or after Nov. 25, 2025.
Looking ahead
The IRS and Treasury have requested comments on several issues, including whether these allocation rules should also apply to partnership-level foreign taxes and whether other multi-year tax rules may need similar adjustments. As businesses and advisers begin planning for the end of the one-month deferral election, these details matter.
Notice 2025-72 serves as an anchor during the transition. It clarifies how U.S. shareholders should handle foreign taxes, how income categories should be measured and how year-end changes ripple into Subpart F, GILTI and foreign tax credit calculations. Even with the complexity, the notice aims to keep taxpayers on steady footing as the law evolves.
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NATP Staff