Treasury released proposed regulations (the Proposed Regulations) under the new dividends received deduction (DRD) and anti-hybrid rules as enacted under Sections 245A and 267A, respectively. Section 245A generally provides a 100% DRD for the foreign-source portion of dividends received by a US corporation from foreign corporations with respect to which it is a US corporate shareholder. Section 267A disallows deductions for certain related-party payments in connection with hybrid transactions or made by or to hybrid entities.
The Proposed Regulations, released December 20, are the first administrative guidance under both Section 245A and Section 267A, which were enacted by the 2017 tax reform act (the Act). The regulations also propose to modify the dual-consolidated loss (DCL) rules under Section 1503(d) and the check-the-box rules under Section 7701.
The Proposed Regulations provide needed guidance related to the mechanics of the new anti-hybrid provisions under Sections 245A and 267A, but also provide several rules that expand the reach of those sections. In particular, the regulations under Section 245A propose to deny the DRD in cases where certain US shareholders receive a ‘hybrid dividend’ made by controlled foreign corporations (CFCs), clarify the application of Section 245A for hybrid dividends of tiered corporations, and address certain ‘hybrid deduction accounts’ that are relevant upon the transfer of CFC stock. In addition, the Proposed Regulations clarify the scope of Section 267A as applied to hybrid arrangements involving the payment of interest or royalties by certain branches, reverse hybrid entities, and other hybrid mismatch arrangements. This guidance also proposes to modify the DCL and check-the-box regulations in order to prevent the use of the same deduction in both the United States and in a foreign country. Finally, the Proposed Regulations amend a number of tax reporting requirements under Sections 6038, 6038A, and 6038C.
The Proposed Regulations, which are the first regulatory guidance under Sections 245A and 267A, clarify the application of guidance related to the mechanics of those provisions and expand the statutory rules in a number of respects.
Taxpayers should immediately assess the impact of the provisions in the Proposed Regulations, and consider commenting on issues that Treasury should address before publishing final Section 245A, Section 267A, and DCL guidance.
The above-mentioned highlights are not an exhaustive list of the provisions in the Proposed Regulations. We expect to publish an in-depth Insight in the coming weeks.
Partner, Washington National Tax Services ITS Leader, PwC US