In Notice 2023-55, released on July 21, 2023, the IRS grants taxpayers temporary—but very welcome--relief from new foreign tax credit rules adopted as final regulations published on January 4, 2022 (the “2022 FTC Regulations”).¹ The 2022 FTC Regulations imposed new and significant restrictions on US taxpayers’ ability to credit foreign taxes.  The IRS responded to the backlash caused by the 2022 FTC Regulations by issuing revisions to clarify their intended application² and proposed regulations to provide some relief for licenses and foreign taxes that restrict certain deductions.³

These targeted attempts have alleviated some of the problems created by the language in the 2022 FTC Regulations, but they have not addressed the more fundamental issues in the 2022 FTC Regulations. Indeed, the changes, both intended and perhaps unintended, made by the 2022 FTC Regulations were so extensive and far-reaching that many taxpayers remain unsure whether specific foreign taxes are creditable. In other cases, foreign income taxes whose creditability no one previously questioned, such as Brazilian income tax and many countries’ withholding taxes on payments for royalties and services, suddenly appeared no longer creditable. Many taxpayers have therefore continued to request that the Treasury Department withdraw or substantially revise the 2022 FTC Regulations.

In Notice 2023-55, the IRS recognizes the need to revise the 2022 FTC Regulations.  While the Treasury Department undertakes this analysis and works on proposed amendments, Notice 2023-55 gives taxpayers a two-year (retroactive)⁴ reprieve from major aspects of the 2022 FTC Regulations while the Treasury Department determines more permanent changes to US foreign tax credit rules.

More specifically, Notice 2023-55 allows taxpayers generally to apply the foreign tax credit rules in effect prior to the 2022 FTC Regulations to determine which foreign taxes are eligible for the US foreign tax credit.  This ability to use old law applies both to foreign income taxes and withholding taxes.  The only significant exception is that the old rule regarding the treatment of gross basis income taxes is replaced with new language to ensure that the typical digital services tax is not creditable.   

Because Notice 2023-55 suspends only certain parts of the 2022 FTC Regulations, leaving the less controversial parts of the 2022 FTC Regulations in place, taxpayers will need to read the old and new foreign tax credit rules in conjunction with each other.  The notice states that the examples and cross-references in the old section 1.901-2 regulations and in the regulations that remain in effect are “considered modified as appropriate.” The notice gives some specific examples how to interpret such deemed amendments, but some short-term confusion is inevitable given the various cross references and interrelationship of rules and examples. 

To take advantage of the two-year suspension, a taxpayer must apply the temporary relief consistently across all foreign taxes.⁵ No filing or affirmative election is necessary.  For taxpayers that have already filed their 2022 income tax returns, however, taking advantage of this retroactive relief may require them to revisit positions on their 2022 return and file an amended return if needed.

[1] T.D. 9959, 87 F.R. 276.

[2] See 87 F.R. 45018 and 87 F.R. 45021.

[3] REG-112096-22, 87 F.R. 71271.

[4] The relief period is for taxable years beginning on or after December 28, 2021, and ending on or before December 31, 2023.

[5] More specifically, the taxpayer must apply the temporary relief to (1) all foreign taxes paid by the taxpayer in the taxpayer’s relief year, and (2) all foreign taxes (i) that are paid by any other person (such as a controlled foreign corporation) in a taxable year that begins on or after December 28, 2021, and that ends with or within the taxpayer’s relief year, and (ii) for which the taxpayer would be eligible to claim a credit if the taxpayer applied the temporary relief to such foreign taxes.  A member of a consolidated group may apply the temporary relief to a relief year only if all members of the consolidated group apply the temporary relief to the relief year.