Highlights of the proposed regulations on dual consolidated losses and certain disregarded payments

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 in the context of certain foreign minimum tax regimes, such as those arising under Pillar Two, including exceptions to the application of the DCL rules in this context. Finally, the regulations include new rules to track certain disregarded payments that are deductible for foreign tax purposes and may deem US income to arise if certain events occur.

Why is it relevant?

The DCL rules are found in Section 1503(d) and the regulations thereunder and are intended to prevent a single economic loss from offsetting or reducing income subject to US tax (but not a foreign country's tax) and income subject to the foreign country's tax (but not US tax).

The proposed regulations provide guidance on the DCL rules’ interaction with the intercompany transaction regulations and computing the income or a DCL attributable to a separate unit or dual resident corporation and update various definitions and operating rules to address the rules’ interactions with qualified domestic minimum top-up taxes (QDMTTs) or income inclusion rules (IIRs) of foreign tax regimes.

The proposed regulations also introduce entirely new provisions regarding so-called disregarded payment losses (DPLs). Those rules would deem consent of a domestic corporation to be subject to the rules and also provide rules for calculating and reporting DPLs, the combination of certain disregarded entities, and the triggering events requiring the inclusion in income of DPLs. The proposed regulations also address the application of the DPL rules to dual resident corporations, as well as the interaction with the DCL rules.

Finally, the proposed regulations provide a new anti-avoidance rule to address transactions and arrangements that are entered into with a view to avoiding the purposes of the DCL rules or the newly proposed DPL rules.

Actions to consider 

Companies should consider whether to submit comments on these new proposed regulations. Comments are due by October 7, 2024, 60 days after the proposed regulations were published in the Federal Register.