Better late than never: New CFC exemption election offers multinationals relief from Section 987 foreign currency rules

On August 14, 2026, the Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) released proposed regulations, REG-103844-26 (Proposed Regulations), creating a “CFC Exemption Election” under section 987.¹ The election allows controlled foreign corporations (CFCs) to generally opt out of computing and recognizing foreign currency gain or loss on remittances from qualified business units (QBUs) under section 987(3). However, all CFCs must continue to apply section 987(1) and (2) to determine and translate their taxable income and earnings and profits.

The Proposed Regulations: 

• Provide retroactive election relief back to 2025;
• Allow for an extended transition period to make the election for taxable years ending in or before 2027;
• Include consistency requirements; and 
• Require amortization of pre-existing unrealized section 987 gain or loss amounts over a 120-month period except for CFCs that qualify for a de minimis exception.

The Proposed Regulations permit reliance before they are finalized. Accordingly, multinational corporations with CFCs that own section 987 QBUs should evaluate whether the election is beneficial, considering compliance relief and anticipated tax impact based on their particular situation. In light of the timing of the issuance of the proposed regulations, deep into the 2025 compliance season, taxpayers considering the election for 2025 also need to evaluate whether to rush to make the election on their original return for 2025 or retroactively make the election for 2025, which may be done on an amended return filed by October 15, 2027.

Background

Section 987 requires taxpayers with a QBU² that has a functional currency different from the taxpayer’s functional currency to separately compute income in the QBU’s functional currency, translate that income into the taxpayer’s functional currency, and recognize any foreign currency gain or loss upon transfers out of section 987 QBUs. Treasury and the IRS proposed rules under section 987 in 1991 (equity-pool method) and again in 2006 (balance-sheet approach); and finalized rules in 2016 (providing a detailed framework with marked/historic items) – however, the effective date of these final regulations was repeatedly deferred. In 2024, Treasury and the IRS overhauled the system with revised final regulations that became effective in 2025, which are the first binding rules to apply under section 987.

All versions of the regulations to date have applied all of section 987 to CFCs and imposed detailed tracking requirements and calculations, creating a significant compliance burden that many taxpayers described as disproportionate to the potential revenue at stake. In February 2026, the IRS acknowledged these concerns in Notice 2026-17 and previewed the CFC Exemption Election in an attempt to provide relief.³

Operative Rules

The CFC Exemption Election eliminates section 987 gain or loss recognition on remittances (i.e., net distributions from the section 987 QBU to its CFC owner). As a result, it is not necessary to track historic exchange rates for QBU assets and liabilities or transfers in and out of the section 987 QBU. The election applies to section 987 QBUs of a CFC owned through a partnership and to QBUs the taxpayer treats as a section 987 QBU of a partnership, provided the partnership is 80% owned by related CFCs. 

To transition into the election, taxpayers must generally compute any unrecognized section 987 gain or loss from prior years (pre-election section 987 gain or loss) and amortize it ratably over a 120-month period. However, taxpayers that elected to amortize their pretransition section 987 gain or loss under the 2024 final regulations and that also elect the CFC Exemption Election for the first available year (beginning in 2025) generally do not have any additional amortization requirement, because the requirements related to the two elections substantially overlap. The only potential additional amortization in that case relates to section 987 gain or loss in connection with partnerships, which were not subject to the transition rule of the 2024 final regulations. 

Recognizing that reconstructing pre-election section 987 gain or loss can be burdensome, the Proposed Rules provide a de minimis exception from the CFC Exemption Election transition rule for section 987 QBUs with average US GAAP assets of less than $50 million over the preceding three years. This threshold applies on a country-by-country aggregated basis within each CFC. 

Eversheds Sutherland Observation: Taxpayers that elected to amortize their pretransition section 987 gain or loss under the 2024 final regulations and that also make the CFC Exemption Election for the first taxable year starting in 2025 do not amortize pre-transition section 987 gain or loss for QBUs that qualify for this de minimis exception under either rule.

 

The CFC Exemption Election is generally required to be made by filing an election statement before the start of the taxable year for which the election is made. However, the election may be made retroactively for US shareholder taxable years beginning in 2025 on either an original return or an amended return filed by October 15, 2027. The election can be made for US shareholder taxable years that begin and end in 2026 on an original timely filed (including extensions) return. Finally, for taxable years ending in 2027, the election can be made by filing a statement by October 15, 2027. 

The election can be made, but not revoked, without the Commissioner’s consent. The election must be applied consistently across all commonly controlled CFCs and affiliated domestic corporations. 

Gain Recognition on Inbound Nonrecognition Transactions

If a CFC to which the CFC Exemption Election applies engages in an inbound nonrecognition transaction, the Proposed Regulations require the CFC to recognize gain (but not loss) immediately before the inbound transaction. The gain to be recognized is intended to reflect the CFC’s increase in asset basis attributable to currency fluctuations, which would otherwise be imported into the US tax system without a corresponding income inclusion. The Proposed Rules provide two alternative methods to compute the gain to be recognized. A de minimis rule exempts CFCs with less than $25 million of asset basis from the gain recognition requirement.

Eversheds Sutherland Observation: Taxpayers should evaluate whether the CFC Exemption Election is beneficial in light of their expected compliance savings and the anticipated tax impact.  This analysis should consider (i) the quantum of their section 987 exposure, both going forward if not making the election and with respect to the amortization of pre-election gain or loss if making the election; (ii) the likelihood and likely impact of implicating the inbound nonrecognition transaction rule; (iii) and financial accounting implications of eliminating U.S. tax currency exposure related to CFC’s investments in section 987 QBUs.

 

Key Deadlines

November 12, 2026	Due date for comments and requests for hearing
October 15, 2027	Deadline to make the CFC Exemption Election for taxable years beginning in 2025 (amended return), taxable years ending in 2026 (original timely filed return), and taxable years ending in 2027
On or before the first day of the taxable year to which the CFC Exemption Election applies	Deadline to make the CFC Exemption Election for taxable years ending after December 31, 2027

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If you have any questions about this Legal Briefing, please feel free to contact any of the attorneys listed or the Eversheds Sutherland attorney with whom you regularly work.

_{1 Unless otherwise stated, all section references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg. §” references are to the regulations promulgated thereunder by the Treasury as in effect as of the date of this client alert, as relevant.} 

_{2 A QBU is, generally, a separate and clearly identified unit of a trade or business of a taxpayer that maintains separate books and records. Section 989(a); Treas. Reg. § 1.989(a)-1.}

_{3 We previously published a client alert explaining the key takeaways from Notice 2026-17 here. Additional proposed regulations are expected to address other simplification measures announced in Notice 2026-17, including an elective equity-and-basis-pool method.}