Final and Proposed Section 245A(e) regulations: Additional analysis

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April 2020

Overview

Treasury and the IRS on April 7 released regulations that finalize 2018 Proposed Regulations addressing anti-hybrid rules under Sections 245A(e) and 1503(d).  On the same date, Treasury and the IRS issued additional 2020 Proposed Regulations under Sections 245A(e) and 951A.

The Final Regulations retain the architecture of the 2018 Proposed Regulations, but make a number of changes based on comments Treasury and the IRS had received.  While a number of these changes provide additional clarity or narrow the scope of the anti-hybrid rules in specific ways, other changes may widen their reach.  Accordingly, taxpayers will need to reevaluate the impact of the anti-hybrid rules in light of the Final Regulations.  

The 2020 Proposed Section 951A Regulations may, for purposes of computing tested income or loss, impact the deductibility of items relating to prepayments made to related foreign corporations that have a fiscal year-end during the so-called ‘gap’ period between January 1, 2018 and the first tax year of such foreign corporation to which Section 951A applied.

For more details regarding the Final Section 267A Regulations (including a narrower definition of ‘interest’ which could provide insight with respect to potential modifications to the proposed Section 163(j) regulations) and Proposed Section 881 Regulations, please see our companion Insight.

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The takeaway

The Final Regulations provide guidance related to the anti-hybrid provisions of Section 245A(e).  They retain the overall architecture of the 2018 Proposed Regulations but make a number of changes that either clarify, expand, or narrow the reach of the 2018 Proposed Regulations and thus may impact how taxpayers are affected by these rules.  Finally, the 2020 Proposed Section 951A Regulations provide an additional rule with respect to deductions related to prepayments made to a fiscal year CFC during the disqualified period.

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Doug McHoney

International Tax Services Leader, PwC US

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