IRS issues Notice 2025-75, Notice 2025-77, and Notice 2025-78

On December 4, 2025, the United States Internal Revenue Service (IRS) published Notice 2025-75, Notice 2025-77, and Notice 2025-78 providing guidance on certain provisions that were modified as a result of the H.R. 1, P.L. 119-21, known as the One Big Beautiful Bill Act (OBBBA).

Below is an overview of each Notice and key considerations for the proposed regulations.

Notice 2025-75: Transition rules for dividends and ownership periods

The OBBBA modified the application of Section 951(a)(2)(B) for certain tax years of foreign corporations beginning after January 1, 2025. These changes facilitate amendments to Section 951(a) (subpart F income) and Section 951A – previously global intangible low-taxed income (GILTI), now referred to as “net controlled foreign corporation (CFC) tested income.”

Section 951(a)(2)(B) requires a US shareholder of a CFC to include in gross income its pro rata share of a subpart F income and GILTI when a US shareholder owns (within the meaning of Section 958(a)) stock of the CFC on the last day of the CFC’s taxable year.

Effective for taxable years of foreign corporations beginning after December 31, 2025, the OBBBA modifies Section 951(a) (subpart F income) and Section 951A (net CFC tested income) to provide that a US shareholder’s pro rata share of subpart F income and tested income or loss of a CFC is the portion of such income attributable to the stock of such CFC owned by such shareholder attributable to any period of the CFC’s taxable year during which:

1. The shareholder owns the stock
2. The shareholder is a US shareholder of the corporation, and
3. The corporation is a CFC.

The amendment removes the requirement that a US shareholder owns the stock of a CFC on the last day of the CFC’s taxable year. Instead, inclusion is based on any period of ownership during which these three criteria are satisfied.

The transition rule

As a result of this change, a transition rule was required. The current Section 951(a)(2)(B) addresses cases in which stock of a CFC owned by a US shareholder on the last relevant day was acquired by the US shareholder during the CFC’s taxable year. In these cases, Section 951(a)(2)(B) generally reduces the US shareholder’s pro rata share of the CFC’s subpart F income or tested income by the amount of distributions received by any other person during the taxable year as a dividend with respect to the acquired stock. Under the transition rule, certain dividends are not treated as dividends for purposes of applying Section 951(a)(2)(B), except as provided by the Secretary.

A dividend is subject to the transition rule if it is:

1. Paid or deemed paid on or before June 28, 2025, during the CFC’s tax year that includes that date, provided the US shareholder described in Section 951(a) did not directly or indirectly own (within the meaning of Section 958(a)) the stock during the portion of the taxable year on or before June 28, 2025, or
2. Paid or deemed paid after June 28, 2025, and before a foreign corporation’s first taxable year beginning after December 31, 2025.

Any dividend subject to the transition rule is not treated as a dividend for purposes of applying Section 951(a)(2)(B) if it does not increase the taxable income of a US person (including by reason of a dividends received deduction, an exclusion from gross income, or an exclusion from subpart F income).

In Notice 2025-75, the IRS announced its intent to issue proposed regulations regarding the transition rule. The proposed regulations would apply to the CFC’s tax years that either (1) include June 28, 2025, or (2) begin after June 28, 2025, but before such CFC’s first tax year beginning after December 31, 2025.

Specifically, the proposed regulations will provide rules addressing:

1. The meaning of “dividends paid (or deemed paid)”
2. The meaning of “a US person subject to federal income tax”
3. Look-through rules for partnership and S corporations, and
4. The meaning of “does not increase taxable income.”

Taxpayers may refer to Notice 2025-75 until the forthcoming proposed regulations are published in the Federal Register. During the transition period, Notice 2025-75 also specifies a priority rule under which the transition rule applies after applying Section 245A and Treas. Reg. § 1.245A-5. Therefore, a US taxpayer may still make a “closing of the year” election under Treas. Reg. § 1.245A-5, provided the other conditions in Treas. Reg. § 1.245A-5(e)(3)(i)(A) are met.

Notice 2025-77: Section 960(d)(4) foreign tax credit disallowance on PTEP distributions

Effective for tax years beginning after December 31, 2025, Section 70312 of the OBBBA modified the rules relating to deemed-paid foreign taxes paid or accrued by a CFC, the income of which is subject to tax under Section 951(a) (subpart F income) or Section 951A (net CFC tested income).

Under Section 960, a domestic corporation that is a US shareholder of a CFC may claim a foreign tax credit for foreign income taxes paid or accrued or deemed paid due to a Section 951A inclusion.

Prior to amendment under the OBBBA, Section 960(d)(1) reduced deemed-paid foreign tax credits as a result of Section 951A inclusions by 20 percent, allowing domestic corporate US shareholders to utilize 80 percent of their deemed-paid credits to offset Section 951A inclusions.

The OBBBA modified Section 960(d)(1) to change the reduction in deemed-paid foreign tax credits for Section 951A inclusions from 20 percent to 10 percent, allowing domestic corporate US shareholders to utilize 90 percent of their deemed paid credits to offset Section 951A inclusions. However, Section 960(d)(4) was added to the Internal Revenue Code, and disallows credit for 10 percent of foreign income taxes paid or accrued on distributions of previously taxed earnings and profits (PTEP) resulting from Section 951A inclusions.

Per the OBBBA, Section 960(d)(4) applies to the foreign income taxes paid or accrued (or deemed paid under Section 960(b)(1)), with respect to a Section 959(a) distribution to the extent the PTEP results from a Section 951A inclusion of a US shareholder in a taxable year ending after June 28, 2025. The relevant taxable year is that of the US shareholder, and therefore, the Section 951A inclusion may include tested income of a CFC from a taxable year of the CFC that ends on or before June 28, 2025.

As a result of this effective date, Notice 2025-77 provides that forthcoming regulations will divide the “Section 951A PTEP” group into two groups:

1. PTEP from a Section 951A inclusion in a taxable year of a US shareholder ending on or before June 28, 2025 (i.e., pre-June 29, 2025 Section 959A PTEP), and
2. PTEP from a Section 951A inclusion in a taxable year of a US shareholder ending after June 28, 2025 (i.e., post-June 28, 2025 Section 951A PTEP).

Notice 2025-77 provides that for distributions of post-June 28, 2025 Section 951A PTEP, no credit is allowed under Section 901 for 10 percent of any foreign income taxes paid or accrued (or deemed paid under Section 960(b)(1)) with respect to a Section 959(a) distribution of post-June 28, 2025 Section 951A PTEP.

Due to the mid-year effective date of Section 960(d)(4), taxpayers are required to allocate and apportion taxes between the pre- and post-PTEP categories. The forthcoming proposed regulations would apply to foreign income taxes paid or accrued (or deemed paid under Section 960(b)(1)) with respect to any amount excluded from gross income under Section 959(a) by reason of an inclusion in the gross income of a US shareholder under Section 951A(a), provided that the inclusion is in a taxable year of the US shareholder ending after June 28, 2025.

Taxpayers may refer to Notice 2025-77 for taxable years of US shareholders beginning before the proposed regulations are published in the Federal Register, provided they apply the guidance consistently and entirely.

Notice 2025-78: Application of Section 250 to exclusion of certain property from deduction eligible income

Effective for sales, other dispositions, deemed sales, other dispositions, and any other transaction subject to Section 367(d) occurring after June 16, 2025, Section 70322 of the OBBBA modified Section 250(b)(3) by adding Section 250(b)(3)(A)(i)(VII), which excludes from deduction eligible income (DEI) any income or gain from the sale or other disposition (including deemed sales, dispositions, or transactions subject to Section 367(d)) of intangible property or other property subject to depreciation, amortization, or depletion.

Notice 2025-78 provides that the IRS and US Department of the Treasury intend to issue forthcoming proposed regulations addressing the scope of Section 250(b)(3)(A)(i)(VII). In addition to issuing regulations that reinforce the notion that a Section 367(d) outbound exchange is treated as a deemed sale and intangible property is defined by reference to Section 367(d)(4), Notice 2025-78 provides additional detail as to what constitutes “other excluded property.”

Specifically, Notice 2025-78 provides that “other property of a type that is subject to depreciation, amortization, or depletion by the seller,” means property that is not Section 367(d)(4) intangible property and that, in the hands of the seller:

1. Is or has been treated as property, subject to the allowance for depreciation under Section 167
2. Is or has been subject to an allowance for amortization (other than described in paragraph (i)), or
3. Is or has been subject to the allowance for depletion under Section 611 (i.e., depletion deductions for mines, wells, and other natural deposits).

Notice 2025-78 also adds a related party anti-abuse rule that prohibits property that was “other excluded property” from qualifying as DEI where a transaction (or series of transactions) was entered into with a principal purpose of avoiding the application of the other excluded property rules. An example includes the transfers of depreciated assets in carryover basis transactions among related parties before being sold to unrelated parties.

The forthcoming proposed regulations, when finalized, will apply to sales or other dispositions (including deemed sales, deemed dispositions, or transactions subject to Section 367(d)) occurring after June 16, 2025.

Taxpayers may refer to Notice 2025-78 for sales or other dispositions occurring before the forthcoming proposed regulations are published in the Federal Register, provided they apply the guidance consistently and entirely.

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