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28 July 20235 minute read

IRS releases Notice 2023-55: Top points for taxpayers

On July 21, 2023, the Internal Revenue Service (IRS) issued Notice 2023-55, which provides temporary relief for taxpayers in determining whether a foreign tax is credible under sections 901 and 903.

For tax years beginning on or after December 28, 2021 (ie, the date on which the new foreign tax credit regulations became effective), and ending on or before December 31, 2023, Notice 2023-55 allows taxpayers to temporarily apply the foreign tax credit (FTC) rules that applied before the publication of Treasury Decision 9959 on January 4, 2022, with certain modifications (the Former FTC regulations), to determine whether a foreign tax is eligible for an FTC.


On November 12, 2020, Treasury published proposed regulations, which substantially modified existing regulations under sections 901 and 903.

In particular, the 2020 proposed regulations changed the definition of what constitutes a creditable foreign tax. Section 901 allows a FTC for foreign taxes paid on foreign income; section 903 provides a FTC for foreign taxes paid “in lieu of” a generally imposed foreign income tax (generally, gross-based withholding tax on payments to a nonresident entity).

The 2020 proposed regulations were met with concern from commentators and taxpayers alike. Specifically, many raised concerns that foreign taxes that would have been considered creditable under the prior FTC regime would likely not meet the new criteria outlined to claim a FTC, resulting in double taxation.

In spite of these comments, Treasury finalized the FTC regulations on January 4, 2022, in substantially the same form as the 2020 proposed regulations. In response to further public criticism, on November 22, 2022, Treasury released new proposed regulations, which relaxed the cost-recovery requirement and source-based attribution requirement for withholding taxes on royalties. The IRS subsequently issued guidance (Notice 2023-31) clarifying the single-country exception on April 3, 2023.

Under the Former FTC regulations, a foreign tax must be treated as a tax imposed on “net gain” to be a creditable tax. Among other changes, the 2022 final regulations altered the net gain requirement by including an “attribution” requirement. The attribution requirement for nonresident taxpayers is satisfied when the foreign tax is imposed based on the taxpayer’s activities or property ownership in such foreign country, or when the tax is imposed under sourcing rules that are reasonably similar to those of the US.

As an example, in a majority of jurisdictions, withholding taxes on royalties are sourced based on the location of the payor. Under US law, however, royalties are sourced based on the place of use of the underlying intellectual property giving rise to the royalty. The attribution requirement called into question the creditability of foreign taxes in numerous jurisdictions which had historically been creditable taxes; furthermore, the analysis required to conclude whether this condition was satisfied was perceived as overly burdensome by taxpayers.

The November 2022 proposed regulations adjusted the application of the cost recovery requirement and modified the attribution requirement for withholding taxes by adding a new single-country licensing exception. Under this exception, the source-based attribution requirement is satisfied if the use of the licensed property is contractually limited to a single country, regardless of whether such country’s sourcing rules align with the US rules.

Notice 2023-55

Notice 2023-55 provides that taxpayers may apply certain aspects of the Former FTC regulations instead of those imposed under the January 2022 final regulations. First, taxpayers may apply the former rules under prior Treas. Reg. §§ 1.901-2(a) and (b) (except for language relating to the non-confiscatory gross basis tax rule), which generally contain the definition of a foreign income tax and the net gain requirement.

As a result, a taxpayer needs only to satisfy the prior net gain rule (requiring realization, gross receipts, and net income) rather than the new net gain rule (requiring realization, gross receipts, cost recovery, and attribution).  

Second, taxpayers may apply Treas. Reg. § 1.903-1 without applying the attribution requirement. The source-based attribution requirement has generated significant criticism as overly restrictive and detrimental to FTC creditability for historically creditable and non-controversial withholding taxes. By allowing taxpayers to apply Treas. Reg. § 1.903-1 without the source-based attribution requirements, the sourcing rules imposed by the foreign jurisdiction need not align with the US tax rules for the taxpayer to obtain FTCs on such withholding taxes.

Notice 2023-55 clarifies that a gross-basis tax on the provision of digital services does not satisfy the net income requirement under the former rules and remains not creditable as a tax in lieu of an income tax. Therefore, digital service taxes remain outside the scope of FTC creditability. This narrow limitation accords with what taxpayers had originally expected from the new FTC regulations.

Of particular note, the Notice includes a rule that requires taxpayers to apply the rules consistently with respect to all foreign taxes paid in the relief year, including foreign taxes paid by a controlled foreign corporation for which the taxpayer would be eligible to claim a credit. All members of a consolidated group must consistently apply the temporary relief.  Finally, a taxpayer may not apply the temporary relief to claim a FTC for any amount of foreign tax allowable as a deduction.

Going forward

Notice 2023-55 provides welcome relief to taxpayers with foreign taxes that were creditable under the prior regime but may have been subject to doubt because of the 2022 final regulations. Given that the relief period applies retroactively back to tax years beginning on or after December 28, 2021, electing taxpayers will have to amend tax returns and consider the impact of the election on their financial statements.

For more information, please contact the authors.