The US Treasury and IRS have proposed regulations allowing controlled foreign corporations to elect out of recognising certain Section 987 foreign currency gains and losses on QBU remittances, aiming to reduce compliance burdens while introducing consistency requirements and safeguards for inbound nonrecognition transactions.
The US Department of the Treasury and the IRS have initiated a public consultation regarding proposed regulations (REG-103844-26) allowing controlled foreign corporations (CFCs) to elect not to compute or recognise foreign currency gain or loss under Internal Revenue Code (IRC) section 987 upon a remittance from a qualified business unit (QBU), except in certain inbound nonrecognition transactions.
The proposed regulations follow the announcement made by the Department and the IRS in Notice 2026-17.
The proposed regulations outline a significant new election designed to simplify the foreign currency rules under IRC section 987 for controlled foreign corporations (CFCs). Following the framework previewed in Notice 2026-17, these rules aim to drastically reduce the administrative and compliance burdens associated with tracking currency fluctuations for CFCs.
The key components of the proposed regulations include:
The core CFC exemption election
Under the default rules, a taxpayer must recognise foreign currency gain or loss (under section 987(3)) upon receiving a remittance from a qualified business unit (QBU) that operates in a functional currency different from its owner’s. The proposed regulations introduce a CFC exemption election, which allows electing CFCs to bypass computing or recognising section 987 gain or loss on routine remittances or QBU terminations. However, the core rules of sections 987(1) and (2) continue to apply for determining and translating the QBU’s taxable income and earnings and profits.
Election timelines and procedures
Taxpayers are provided with flexible compliance timelines for early taxable years:
- For taxable years beginning after 31 December 2024, and ending on or before 31 December 2026: The election is made by attaching an election statement to an original, timely filed tax return (including extensions).
- Alternative for 2025 taxable years: The election can alternatively be made on an amended return filed on or before 15 October 2027.
- For taxable years ending in 2027: The election statement must be filed on or before 15 October 2027, with a copy attached to the applicable tax return.
- For taxable years ending after 31 December 2027: The election must be filed on or before the first day of the taxable year to which it applies.
Consistency requirements
To prevent selective application (e.g., electing exemption only for CFCs expected to generate gains), the election must be applied consistently across all commonly controlled CFCs in a section 987 electing group. Affiliated domestic corporations are treated as a single entity to ensure uniform treatment across non-consolidated groups.
Exemption for smaller QBUs
The regulations generally require taxpayers to compute and amortise “pre-election” section 987 gains and losses over 120 months. However, a compliance exception is carved out for smaller operations:
- QBUs with average GAAP assets of less than USD 50 million over the preceding three taxable years are deemed to have zero pre-election gain or loss.
- QBUs located within the same country of residence are aggregated for the purposes of applying this USD 50 million threshold.
Special rules for inbound nonrecognition transactions
To prevent exchange-rate-driven asset basis increases from entering the US tax system without taxation, electing CFCs must recognise section 987 gain (but not loss) in certain inbound liquidations or reorganisations.
- Taxpayers can choose between two proxy methods to compute this gain: a 72-month lookback methodology of annual unrecognised gain, or an excess asset basis (EAB) methodology under section 367(b).
- A de minimis rule applies: these inbound gain-recognition rules do not apply if the transferor CFC’s aggregate inside asset basis is less than USD 25 million.
Reliance and comments
Taxpayers are permitted to rely on these proposed regulations for taxable years starting after 31 December 2024 and ending before the final regulations are published, provided that all group members consistently follow them.
The IRS is accepting electronic and written public comments or hearing requests until 12 November 2026.
