Rules Regarding Dual Consolidated Losses and the Treatment of Certain Disregarded Payments

DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 1 and 301</CFR> <DEPDOC>[REG-105128-23]</DEPDOC> <RIN>RIN 1545-BQ72</RIN> <SUBJECT>Rules Regarding Dual Consolidated Losses and the Treatment of Certain Disregarded Payments</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Notice of proposed rulemaking. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains proposed regulations that address certain issues arising under the dual consolidated loss rules, including the effect of intercompany transactions and items arising from stock ownership in calculating a dual consolidated loss. The proposed regulations also address the application of the dual consolidated loss rules to certain foreign taxes that are intended to ensure that multinational enterprises pay a minimum level of tax, including exceptions to the application of the dual consolidated loss rules with respect to such foreign taxes. Finally, the proposed regulations include rules regarding certain disregarded payments that give rise to losses for foreign tax purposes. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> Written or electronic comments and requests for a public hearing must be received by October 7, 2024. </EFFDATE> <HD SOURCE="HED">ADDRESSES:</HD> Commenters are strongly encouraged to submit public comments electronically via the Federal eRulemaking Portal at <E T="03">https://www.regulations</E> (indicate IRS and REG-105128-23) by following the online instructions for submitting comments. Requests for a public hearing must be submitted as prescribed in the “Comments and Requests for a Public Hearing” section. Once submitted to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The Department of the Treasury (Treasury Department) and the IRS will publish for public availability any comments submitted to the IRS's public docket. Send paper submissions to: CC:PA:01:PR (REG-105128-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Concerning the proposed regulations generally, Andrew L. Wigmore at (202) 317-5443; concerning the proposed regulations regarding intercompany transactions, Julie Wang at (202) 317-6975; concerning submissions of comments or requests for a public hearing, Publications and Regulations Section at (202) 317-6901 (not toll-free numbers) or by email at <E T="03">publichearings@irs.gov</E> (preferred). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Background</HD> <HD SOURCE="HD2">I. The Dual Consolidated Loss Rules</HD> <HD SOURCE="HD3">A. In General</HD> Section 1503(d) was enacted in response to concerns that taxpayers were isolating expenses in dual resident corporations to enable two profitable companies, subject to tax in two different jurisdictions, to use the dual resident corporation's losses. <E T="03">See</E> S. Rep. No. 99-313, 99th Cong., 2nd Sess., at 419-421 (1986). Section 1503(d) and the regulations thereunder are intended to prevent this result and to neutralize other types of “double-deduction outcomes,” that is, where the same economic loss could be used to offset or reduce both income subject to U.S. tax (but not a foreign jurisdiction's tax) and income subject to the foreign jurisdiction's tax (but not U.S. tax). <E T="03">See id.</E> and TD 9315 (72 FR 12902). Section 1503(d)(1) generally provides that a dual consolidated loss of a domestic corporation cannot reduce the taxable income of a domestic affiliate (a “domestic use”). <E T="03">See also</E> §§ 1.1503(d)-2 and 1.1503(d)-4(b). Except as provided in regulations under section 1503(d)(2)(B), section 1503(d)(2)(A) defines a dual consolidated loss as any net operating loss of a domestic corporation which is subject to an income tax of a foreign country without regard to whether such income is from sources in or outside of such foreign country, or is subject to such a tax on a residence basis. Section 1503(d)(3) provides regulatory authority to treat any loss of a separate unit of a domestic corporation as a dual consolidated loss. <SU>1</SU> <FTREF/> Accordingly, § 1.1503(d)-1(b)(5) defines a dual consolidated loss as a net operating loss of a dual resident corporation or the net loss of a domestic corporation attributable to a separate unit. <FTNT> <SU>1</SU>  Although the term “separate unit” is not defined in the statute, the legislative history to section 1503(d)(3) provides one example: a foreign branch the losses of which are, under foreign law, able to offset income of an affiliated foreign corporation. <E T="03">See</E> H.R. Rep. No. 100-795, 100th Cong., 2d Sess., at 292-93 (1988). </FTNT> A dual resident corporation is generally defined as a domestic corporation that is subject to an income tax of a foreign country on its worldwide income or on a residence basis. <E T="03">See</E> § 1.1503(d)-1(b)(2)(i). A separate unit is generally defined as either a foreign branch (defined in § 1.1503(d)-1(b)) or an interest in a hybrid entity  <SU>2</SU> <FTREF/> that is carried on or owned, as applicable, directly or indirectly, by a domestic corporation (a “domestic owner” of the separate unit). <E T="03">See</E> § 1.1503(d)-1(b)(4)(i). An affiliated dual resident corporation and an affiliated domestic owner are defined as a dual resident corporation and a domestic owner, respectively, that is a member of a consolidated group. <E T="03">See</E> § 1.1503(d)-1(b)(10). <FTNT> <SU>2</SU>  Hybrid entity means an entity that is not taxable as an association for U.S. tax purposes but is subject to an income tax of a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis. § 1.1503(d)-1(b)(3). </FTNT> Pursuant to section 1503(d)(2)(B), the dual consolidated loss regulations provide certain exceptions to the general prohibition against the domestic use of a dual consolidated loss. For example, the domestic use limitation does not apply if, pursuant to a “domestic use election,” the taxpayer certifies that there has not been and will not be a “foreign use” of the dual consolidated loss during a certification period. <SU>3</SU> <FTREF/> <E T="03">See</E> § 1.1503(d)-6(d). If a foreign use or other triggering event occurs during the certification period, the dual consolidated loss must be recaptured, and an interest charge is imposed on the recaptured amount. <E T="03">See</E> § 1.1503(d)-6(e)(1). In general, a foreign use occurs when any portion of the dual consolidated loss is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, the income of a foreign corporation or the direct or indirect owner of a hybrid entity that is not a separate unit. <E T="03">See</E> § 1.1503(d)-3(a)(1). Other triggering events include certain transfers of the interests in or assets of a separate unit, as well as the failure to satisfy various certification requirements. <E T="03">See</E> § 1.1503(d)-6(e). <FTNT> <SU>3</SU>  Section 1.1503(d)-6(b) (involving certain elective agreements between the United States and a foreign country) and § 1.1503(d)-6(c) (if it can be demonstrated that there is no possibility of a foreign use) also provide exceptions to the prohibition on domestic use. </FTNT> <HD SOURCE="HD3">B. Computing Income or Dual Consolidated Loss</HD> In general, the income or dual consolidated loss of a dual resident corporation for a taxable year is computed based on the dual resident corporation's items of income, gain, deduction, and loss for the taxable year. <E T="03">See</E> § 1.1503(d)-5(b)(1). Similarly, the income or dual consolidated loss of a separate unit is generally computed as if the separate unit were a domestic corporation and based solely on the items of income, gain, deduction, and loss of the domestic owner of the separate unit that are attributable to the separate unit. <E T="03">See</E> § 1.1503(d)-5(c)(1). If the dual resident corporation or domestic owner is a member of a consolidated group, then the computations are made in accordance with rules under section 1502 regarding the computation of consolidated taxable income. <E T="03">See</E> § 1.1503(d)-5(b)(1) and (c)(1). The income or dual consolidated loss of a dual resident corporation or separate unit does not, however, include items attributable to an interest in a “transparent entity.” <E T="03">See</E> § 1.1503(d)-5(b)(2)(iii), (c)(1)(i) and (iii). A transparent entity is an entity that (i) is not taxable as an association for U.S. tax purposes, (ii) is not subject to income tax in a foreign country as a corporation either on its worldwide income or on a residence basis, and (iii) is not a pass-through entity under the laws of the foreign country under which the relevant separate unit or dual resident corporation is subject to tax. <E T="03">See</E> § 1.1503(d)-1(b)(16)(i). A domestic limited liability company that, for U.S. tax purposes, is either disregarded as an entity separate from its owner or classified as a partnership is an example of a business entity that may be a transparent entity if the foreign jurisdiction does not view it as a pass-through entity. Because it is unlikely that items attributable to an interest in a transparent entity are taken into account by the jurisdiction in which the dual resident corporation or separate unit is subject to tax, such items should not affect the calculation or use of a dual consolidated loss. <E T="03">See</E> TD 9315 (72 FR 12902, 12904-05). For purposes of attributing items to a separate unit, only items of the domestic owner of the separate unit that are regarded for U.S. t ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 222k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━