IRS Finalizes Rules to Stop Deals to Artificially Generate Foreign Tax Credit

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IRS finalizes its controversial rules intended to stop highly structured deals intended to artificially generate the foreign tax credit, sticking to the objective approach of 2008 temporary rules but making some changes within that structure, including new language on the so-called “holding company exception” and changing the definition of passive investment income. Similar to the previous rules (T.D. 9416) unveiled two years ago, the new guidance (T.D. 9535) treats foreign payments attributable to these highly structured, passive investment arrangements as “noncompulsory” tax payments that are not eligible for the foreign credit.