Rules Regarding Certain Disregarded Payments and Dual Consolidated Losses

<RULE> DEPARTMENT OF THE TREASURY <SUBAGY>Internal Revenue Service</SUBAGY> <CFR>26 CFR Parts 1 and 301</CFR> <DEPDOC>[TD 10026]</DEPDOC> <RIN>RIN 1545-BQ72</RIN> <SUBJECT>Rules Regarding Certain Disregarded Payments and Dual Consolidated Losses</SUBJECT> <HD SOURCE="HED">AGENCY:</HD> Internal Revenue Service (IRS), Treasury. <HD SOURCE="HED">ACTION:</HD> Final rule. <SUM> <HD SOURCE="HED">SUMMARY:</HD> This document contains final regulations regarding certain disregarded payments that give rise to deductions for foreign tax purposes and avoid the application of the dual consolidated loss (“DCL”) rules. The final regulations affect domestic corporate owners that make or receive such payments. This document also announces additional transition relief for the application of the DCL rules to certain foreign taxes that are intended to ensure that multinational enterprises pay a minimum level of tax. </SUM> <EFFDATE> <HD SOURCE="HED">DATES:</HD> <E T="03">Effective date:</E> These regulations are effective on January 10, 2025. <E T="03">Applicability dates:</E> For dates of applicability, <E T="03">see</E> §§ 1.1503(d)-8(b)(11), (15), (17), and (18), and 301.7701-2(e)(10). </EFFDATE> <FURINF> <HD SOURCE="HED">FOR FURTHER INFORMATION CONTACT:</HD> Andrew L. Wigmore at (202) 317-5443 (not a toll-free number). </FURINF> <SUPLINF> <HD SOURCE="HED">SUPPLEMENTARY INFORMATION:</HD> <HD SOURCE="HD1">Authority</HD> This document contains amendments to 26 CFR parts 1 and 301 (the “final regulations”) under sections 1503(d) and 7701 of the Internal Revenue Code (the “Code”). The final regulations are issued pursuant to the express delegations of authority under section 7805(a), which authorizes the Secretary of the Treasury (the “Secretary”) to “prescribe all needful rules and regulations for the enforcement” of the Code, section 1503(d)(2)(B), which authorizes the Secretary to provide exceptions to the term “dual consolidated loss,” and section 1503(d)(3), which authorizes the Secretary to address losses of “separate units.” <HD SOURCE="HD1">Background</HD> On December 11, 2023, the Department of Treasury (“Treasury Department”) and the IRS released Notice 2023-80, 2023-52 IRB 1583, which, among other things, described the interaction of the DCL rules with model rules published by the OECD/G20 Inclusive Framework on BEPS (the “GloBE Model Rules”)  <SU>1</SU> <FTREF/> and requested comments on such interaction. The notice also announced limited transition relief from the application of the DCL rules to the GloBE Model Rules for “legacy DCLs,” which in general are DCLs incurred before the effective date of the GloBE Model Rules. <FTNT> <SU>1</SU>   <E T="03">See</E> OECD/G20, Tax Challenges Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two). As the context requires, references to the GloBE Model Rules include references to a foreign jurisdiction's legislation implementing the GloBE Model Rules. Capitalized terms used in this preamble, but not defined herein, have the meanings ascribed to such terms under the GloBE Model Rules. </FTNT> On August 7, 2024, the Treasury Department and the IRS published proposed regulations (REG-105128-23) in the <E T="04">Federal Register</E> (89 FR 64750) under sections 1502, 1503(d), and 7701 of the Code, with a correction published in the <E T="04">Federal Register</E> on September 3, 2024 (89 FR 71214) (the “2024 proposed regulations”), that would address certain issues arising under the DCL rules. In general, the 2024 proposed regulations would clarify how the DCL rules interact with the intercompany transaction rules in § 1.1502-13, modify how items arising from stock ownership are taken into account when computing the amount of a DCL, and address the application of the DCL rules to foreign taxes that are based on the GloBE Model Rules. The 2024 proposed regulations also included disregarded payment loss (“DPL”) rules, under which domestic corporations would be required to include amounts in income in certain cases involving disregarded payments. Further, the 2024 proposed regulations included an anti-avoidance rule applicable for both DCL and DPL purposes. This document finalizes certain rules from the 2024 proposed regulations. These rules and related comments received in response to the 2024 proposed regulations are discussed in the Summary of Comments and Explanation of Revisions section of this preamble. All comments are available at <E T="03">https://www.regulations.gov</E> or upon request. A public hearing was held on the 2024 proposed regulations on November 22, 2024, but the speaker requesting to testify did not attend the hearing. The Treasury Department and the IRS intend to finalize, in future guidance, the remaining rules from the 2024 proposed regulations. This document also announces additional transition relief for the application of the DCL rules to foreign taxes that are based on the GloBE Model Rules. This relief is discussed in the Additional Transition Relief with respect to the GloBE Model Rules section of this preamble. <HD SOURCE="HD1">Summary of Comments and Explanation of Revisions</HD> <HD SOURCE="HD2">I. Scope</HD> This document finalizes the rules from the 2024 proposed regulations that relate to DPLs, including portions that are also relevant for DCLs, such as the anti-avoidance rule and the deemed ordering rule. The document retains the basic approach and structure of these rules, with certain revisions. Part II of the Summary of Comments and Explanation of Revisions summarizes the DPL rules, including the purposes and general approach of the rules under the 2024 proposed regulations, and discusses related comments and revisions. Part III discusses comments and revisions related to rules applicable to both DCLs and DPLs. Part IV discusses applicability dates of the final regulations. <HD SOURCE="HD2">II. DPL Rules</HD> <HD SOURCE="HD3">A. Overview</HD> The DPL rules are a component of the entity classification regulations under §§ 301.7701-1 through 301.7701-3 (the “check-the-box regulations”). The check-the-box regulations were intended to bring simplicity and administrability to entity classifications under section 7701. They permit certain business entities to be classified for U.S. tax purposes as entities disregarded as separate from their owners. The classification may be determined either pursuant to default rules or by election. However, the application of these regulations to foreign entities, particularly where a foreign entity is treated as a disregarded entity, has led to unintended tax consequences, including avoidance of international provisions of the Code. The purpose of the DPL rules is to prevent certain arrangements involving disregarded entity classifications from avoiding the DCL rules. As an example, when a domestic corporation borrows from a bank and on-lends the loan proceeds to its foreign disregarded entity, the single economic borrowing could give rise to deductions under both U.S. tax law (for interest payments to the bank) and foreign tax law (for interest payments to the domestic corporation). As a result, if the U.S. deduction is used to offset U.S. income that is not subject to foreign tax, and the foreign tax deduction generates a foreign loss that is used to offset foreign income that is not subject to U.S. tax (for example under a consolidation regime), then the single economic borrowing would give rise to a double deduction outcome. Such double deduction outcome, however, would not be addressed by the existing DCL rules because the loss of the disregarded entity would not be recognized for U.S. tax purposes. Conversely, if the disregarded entity's interest payments were regarded for U.S. tax purposes (for example, if the arrangement involved direct financing of the disregarded entity by the bank), the loss would be subject to the existing DCL rules. This avoidance of the DCL rules is an unintended consequence of the check- the-box regulations which, as noted above, were issued for the simplification and administrability of entity classification determinations. The DPL rules are intended to address these concerns by (i) tracking whether certain payments involving a disregarded entity and its owner give rise to potential double deduction outcomes, and (ii) neutralizing any resulting double deduction outcome through an income inclusion similar to the one that that the owner would have had with respect to the payments had the payments been regarded for U.S. tax purposes (that is, had the classification as a disregarded entity under the check-the-box regulations not been taken into account). As revised under the final regulations, the DPL rules also treat the income inclusion as giving rise to a deduction, the use of which is suspended until the entity takes into account certain disregarded income, with the result that the rules are consistent with what would have occurred if certain disregarded payments were regarded for U.S. tax purposes (as discussed in part II.F of the Summary of Comments and Explanation of Revisions). In this way, the check-the-box regulations continue to permit certain entities to be disregarded for U.S. tax purposes (including by election), but such classifications are subject to new (targeted) rules that prevent the classifications from giving rise to avoidance of the DCL rules. Alternative approaches to addressing these concerns would include more broadly restricting disregarded entity classifications (for example, by requiring a foreign entity to be classified as an association for U.S. tax purposes if the entity is a foreign tax resident, or classifying single-owner foreign entities as associations in all cases). Under the 2024 proposed regulations, the DPL rules would apply with respect to a domestic corporation and a disregard ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━ Preview showing 10k of 134k characters. Full document text is stored and available for version comparison. ━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━━