2023-33: Taxpayers get temporary relief from final Foreign Tax Credit regulations

In January 2022, the IRS issued final regulations that made significant changes to the Foreign Tax Credit (FTC). (TD 9959) The changes attempted to ensure the FTC is only claimed against double-taxed income from activities or investments in a foreign country. Since the final regulations were published, the IRS has received numerous questions and requests for modification from taxpayers and tax professionals who felt that the final regulations went too far.

In response to these inquiries, the IRS is providing temporary relief from the final regulations. (IRS Notice 2023-55) The relief essentially allows taxpayers to apply the FTC rules that were in effect prior to their amendment by the 2022 regulations for the 2022 and 2023 tax years. However, the relief does not apply to certain foreign taxes imposed on digital services, which will remain ineligible for the Foreign Tax Credit.

The changes made to the FTC by the final regulations that concerned most taxpayers include:

  • Adding a jurisdictional nexus requirement (referred to as an “attribution requirement”) for purposes of determining whether a credit can be claimed for a foreign income tax, or tax in lieu of an income tax, paid by a nonresident taxpayer (Treas. Regs. §1.901-2(b)(5)); and
  • Revising the tests used to determine whether the FTC net gain requirement is met for purposes of making the foreign tax paid creditable. (Treas. Regs. §1.901-2(b)

In a nutshell, and very broadly speaking, these final regulations were written to prevent U.S. taxpayers from claiming Foreign Tax Credits for some of the newer extraterritorial taxes being imposed by some foreign countries (e.g., digital services taxes) and those foreign taxes that utilize destination-source or market-based sourcing rules. It will also make foreign taxes based on taxing schemes that do not sufficiently mirror U.S. income tax law noncreditable.

IRS Notice 2023-55 is available at:


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