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Treasury releases proposed regulations on dual consolidated losses and certain disregarded payments
August 2024
In brief
What happened?
Treasury and the IRS on August 6 issued proposed regulations that address certain issues arising under the dual consolidated loss (DCL) rules, including the effect of intercompany transactions and items arising from stock ownership in calculating a DCL. The proposed regulations also address the application of the DCL rules to certain minimum taxes, such as those under Pillar Two.
The proposed regulations also propose entirely new rules regarding certain disregarded payments that give rise to losses for foreign tax purposes.
Why is it relevant?
Section 1503(d) and the regulations thereunder are intended to prevent ‘double dipping’ of the same economic loss that could be used to offset or reduce both income subject to US tax (but not a foreign jurisdiction's tax) and income subject to the foreign jurisdiction's tax (but not US tax).
The proposed regulations provide guidance on the DCL rules for the interaction with the intercompany transaction regulations, computing income or dual consolidated loss, provide a new anti-avoidance rule that generally is intended to address additional transactions, or interpretations, that may attempt to avoid the purposes of the DCL rules, and update the definitions of hybrid entities and separate units to include entities subject to a qualified domestic minimum top-up tax (QDMTT) or income inclusion rule (IIR).
The proposed regulations also propose new rules regarding disregarded payment losses, which generally require domestic corporations that own foreign disregarded entities (specified eligible entities) to include in income disregarded payment losses for which there is a triggering event, including foreign use. The proposed regulations also address the disregarded payment loss calculation, triggering events, the disregarded payment loss inclusion amount, the disregarded payment entity combination rule, the application to dual resident corporations, and the interaction with DCL rules.
Actions to consider
Companies should consider whether to submit comments on these proposed regulations. Comments are due 60 days after the proposed regulations are published in the Federal Register. Companies should also determine how the proposed disregarded payment loss rules could apply if finalized as proposed.
Applicability dates
The applicability dates of the proposed regulations, if adopted, vary depending on the relevant provision. Generally, provisions are proposed to apply to tax years ending on or after August 6, 2024.
A taxpayer may rely on the proposed regulations relating only to the DCL rules for any tax year ending on or after August 6, 2024 and beginning on or before the date that regulations finalizing these proposed regulations are published in the Federal Register, provided that the taxpayer and all members of its consolidated group apply the proposed regulations in their entirety and in a consistent manner for all tax years beginning with the first tax year of reliance until the applicability date of those final regulations.
The proposed rules relating to disregarded payment losses apply to consenting taxpayers beginning August 6, 2024. Taxpayers must consent to the application of the disregarded payment loss rules with respect to specified eligible entities that were formed or acquired, or for which entity classification elections are filed, on or after August 6, 2024, regardless of when the election is effective. The proposed regulations would deem taxpayers to consent to the application of the disregarded payment loss rules with respect to a specified eligible entity as of August 6, 2025, unless an election is made to treat such entity as an association for US tax purposes.
In detail
PwC will publish a more detailed analysis of the proposed regulations soon.
See also
- Tax Insight: Treasury releases guidance on the GloBE rules and foreign tax credit (December 11, 2023)
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