U.S. international tax rules rarely change in a straight line. When they move, they ripple through private equity and venture capital structures in ways that affect deal terms, fund economics, and compliance budgets. The One Big Beautiful Bill Act (OBBBA) is a case in point. It restores Section 958(b)(4), and it introduces new Section 951B: rules aimed at recalibrating how the U.S. treats ownership and control of foreign corporations, especially where foreign owners sit alongside U.S. investors. While this may sound unique to a subset of the industry, the rules can have meaningful impacts related to structuring decisions and after-tax returns for sponsors with foreign portfolio companies, or with funds that mix U.S. and non-U.S. limited partners.
Why 958(b)(4) Matters
Before 2017, Section 958(b)(4) limited downward attribution from pulling certain foreign-owned corporations into the U.S. anti-deferral regime. That guardrail fell with the Tax Cuts and Jobs Act (TCJA), and the result surprised many sponsors: foreign portfolio companies that U.S. investors did not truly control started to look like controlled foreign corporations (CFCs) on paper. These “faux CFCs” triggered income inclusion and reporting requirements for minority U.S. investors, often without any economic benefit. The fallout was predictable: more complexity, phantom income issues, and higher compliance costs at both the fund and portfolio-company levels.
The OBBBA Fix and a New IRS Code Section to Watch
OBBBA restores Section 958(b)(4), effective for tax years beginning after Dec. 31, 2025, removing a large swath of those unintended CFC outcomes. Minority U.S. investors should see fewer surprise inclusions and an overall simplification of their reporting footprint. At the same time, Congress added Section 951B, a targeted regime for “foreign-controlled U.S. shareholders” (FCUSS). Section 951B applies Subpart F and GILTI inclusion rules to FCUSS that own more than 50% of foreign controlled foreign corporations. In short, 951B targets structures that may be viewed as abusive where foreign control is present.
For private equity and venture capital funds, the practical message is straightforward: structures that looked unfavorable from 2018 through 2025 may deserve a second look. But “fix” does not mean “free pass.” The new rules reshape exposures; they don’t eliminate them.
Key Issue #1: Pop-Up PFICs
When CFC status is removed, something else can surface: PFIC status. The passive foreign investment company rules are cumbersome, often more punitive than CFC rules and less forgiving if you delay elections. Many investors enjoyed the relative comfort of the CFC-PFIC overlap protections over the last several years. With OBBBA’s changes, that safety net may not be there.
What to watch:
- Loss of overlap protection: Without CFC status, a portfolio company can fall into PFIC status based on passive income or asset tests.
- Elections become critical: Qualified electing fund (QEF) elections or mark-to-market elections can mitigate harsh PFIC outcomes, but timing matters, and investor-level coordination is key.
- Return timing mismatches: PFIC inclusions can decouple tax from cash, draining after-tax IRR if not managed early.
CFOs and tax directors should run “pop-up PFIC” diagnostics now. Identify which portfolio companies could drift into PFIC status post-2025 and map the election strategy across investor types.
Key Issue #2: Structuring in a Diverse LP World
The nuances of IRS rules and regulations still drive whether an entity qualifies as a CFC or PFIC. Small percentage moves, option arrangements, or “deemed ownership” provisions can flip the analysis. Planning levers remain available:
- U.S. partnerships as holding vehicles can streamline U.S. investor reporting and help manage inclusions and elections.
- Adjusting ownership percentages or revisiting option mechanics can preserve desired tax status where it meaningfully improves after-tax outcomes.
- Restructuring to preserve CFC treatment may be beneficial if it avoids PFIC exposure and aligns with operational goals.
Funds that pool U.S. and foreign LPs face layered complexity: the “right” answer for U.S. tax law may not align with non-U.S. investor preferences. Absent an explicit plan, funds can end up with higher compliance costs, uneven investor experiences, and trapped value at exit when prospective buyers include tax uncertainty in determining purchase price.
What CFOs and Tax Leaders Should Do Now
- Map ownership structures against the 2026 effective dates: Build a clean inventory, noting who owns what, where options sit, and how constructive ownership could apply under the revised rules.
- Flag pop-up PFIC risk: Run passive income/asset tests for foreign portfolio companies. Pre-wire QEF or mark-to-market elections where appropriate and prepare investor communications templates.
- Model 951B exposure: Identify situations in which foreign control, together with U.S. shareholders, could trigger the new regime and quantify the carry/IRR impact.
- Coordinate across mixed LP bases: Align fund-level strategy with side letters and investor profiles so no cohort is surprised at K-1 time.
- Reassess financing structures: Revisit cross-border loans, portfolio interest eligibility, and withholding assumptions; lock in documentation that supports desired outcomes.
- Plan exits with tax in focus: PFIC surprises or unclear CFC status at diligence can shave valuation. Bake updated tax assumptions into exit models and data rooms now.
- Execute before the calendar does: Some elections are time-sensitive; others require audited financial statements or information rights. Use 2025 to gather data and sequence steps.
Bottom Line
OBBBA’s adjustments are, on balance, good news for funds and minority U.S. investors who were swept into CFC complexity that was never intended. But relief in one area can create exposure in another. The most common trap will be ignoring PFIC risk until it’s too late to make efficient elections and dealing with the aftermath.
2025 can be viewed as an implementation year. Refresh your structuring playbook, pressure-test financing flows, and coordinate elections. A small amount of planning now can prevent expensive surprises in compliance, financing, and — most importantly — at the moment of exit.
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