Notice 2023-55 Offers Temporary Relief from Final FTC Regulations

The IRS on July 21 issued Notice 2023-55 announcing temporary relief for taxpayers in determining whether a foreign tax is eligible for a foreign tax credit under Sections 901 and 903 of the Internal Revenue Code.

Background

In December 2021, the IRS released final foreign tax credit regulations tightening the requirements under IRC Sections 901 and 903 for a foreign tax to be creditable by revising the net gain requirement and adding an attribution requirement to the analysis. 

The attribution requirement essentially meant that foreign taxes needed to follow source rules that are similar to the U.S. rules. The final FTC regulations generally apply to tax years beginning after December 28, 2021 (for calendar years 2022). 

During the 12 months following the introduction of the final regulations, the IRS attempted to alleviate taxpayer concerns regarding the new stringent requirements and released technical corrections to the cost recovery element of the net gain requirement, as well as subsequent proposed regulations providing safe harbors for both the cost recovery element of the net gain requirement and the royalty sourcing rule under the attribution requirement.

Despite the IRS’s efforts, concerns regarding foreign taxes no longer being creditable and calls to delay the effective date grew. In response, the IRS released Notice 2023-55, which offers temporary relief from the final FTC regulations with certain modifications.

Temporary Relief

Broadly, Notice 2023-55 gives taxpayers the choice to follow the pre-2021 FTC creditability rules for tax years 2022 and 2023, while the IRS considers potential changes to the regulations. Essentially, if a foreign tax was creditable prior to the final FTC regulations, it is expected to be creditable under the temporary relief, subject to the following limitations and eligibility requirements:

• Notice 2023-55 does not apply to digital services taxes (which will continue to be not creditable), or to the nonconfiscatory gross basis tax rule. 
• Taxpayers must apply the temporary relief to all foreign taxes claimed as an FTC. 
• All members of a consolidated group must apply the temporary relief. 
• A taxpayer may not claim an FTC in a relief year when the same foreign tax is taken as a deduction in that, or any other, taxable year.

No affirmative election or statement is required to be filed to claim the temporary relief under Notice 2023-55. Taxpayers may apply the temporary relief to foreign taxes paid or accrued (including by a CFC) in taxable years beginning on or after December 28, 2021, and ending on or before December 31, 2023.