IRS Releases Notice Temporarily Relieving Foreign Tax Credit Restrictions for Taxpayers

On July 21, 2023, the IRS released notice 2023-55 granting temporary relief for determining eligibility for the foreign tax credit. Taxpayers can now claim some foreign taxes that weren’t creditable under FTC creditability regulations until December 31, 2023.

Final regulations for section 901, taxes of foreign countries and of possessions of the United States, and section 903, credit for taxes in lieu of income, were originally published on January 4, 2022.

Here are some changes included in the final regulations:

• Changes to each part of the net gain requirement, including the realization requirement, the gross receipts requirement, and the cost recovery requirement.
• Introduction of the attribution requirement, or jurisdictional nexus requirement, which restricts the foreign tax credit only to taxes if they meet either activities-based attribution, source-based attribution, or property-situs attribution. This has significant implications, particularly for the new digital services tax being introduced in Europe.
• Changes to requirements of in lieu of taxes, with stricter guidelines. For a foreign levy to satisfy the substitution requirement and be considered an in lieu of tax, it would need to pass one of four tests.

These final regulations, which would have been in effect for US taxpayers starting on December 28, 2021, have been relieved from taxpayers until December 31, 2023. Taxpayers may want to consider re-evaluating foreign taxes that were previously excluded.

If you have any questions regarding foreign tax credits or any other international tax matters, please contact our Global Business Services team.