Treasury releases final regulations on disregarded payment losses

In brief

What happened?

Treasury and the IRS on January 10 released 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 own disregarded payment entities (DPEs) and that make or receive such disregarded payments. The rules for disregarded payment losses (DPL) apply to tax years of DPE owners beginning on or after January 1, 2026. The final regulations apply the anti-avoidance rule to DCLs incurred in tax years ending on or after August 6, 2024, and to DPLs for tax years starting on or after January 1, 2026. Additionally, the final regulations revise the deemed ordering rule for determining the foreign use of a DCL or DPL and provide an exception to the 60-month limitation for entity classification elections with respect to certain DPEs, aligning their applicability with January 1, 2026 (i.e., the start date for the DPL rules). 

Notably, the final regulations do not finalize various aspects of the 2024 proposed regulations, including the interaction of the DCL rules with the GloBE Model Rules and other modifications to the DCL rules (e.g., the proposed regulation for the elimination of the inclusion on stock rule). Treasury and the IRS have indicated an intent to finalize, in future guidance, the remaining rules from the 2024 proposed regulations. 

However, the final regulations announce additional transition relief for the interaction of the DCL rules with the GloBE Model Rules. Specifically, when regulations addressing the interaction of such rules are finalized, the final regulations are expected to provide that the DCL rules will apply without taking into account Qualified Domestic Minimum Top-up Tax (QDMTT) or Top-up Taxes collected under an IIR or UTPR incurred in tax years beginning before August 31, 2025. 

Why is it relevant?

The regulations finalize certain 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 final regulations retain the basic approach and structure of the 2024 proposed regulations, with revisions to defer the application of the DPL rules, allow for a suspended deduction in certain fact patterns, provide limited exceptions to narrow the scope of the application of the DPL rules, and to clarify the interaction of the DPL and DCL rules.  

Actions to consider

Taxpayers may rely on the guidance for the additional transition relief for the interaction of the DCL and GloBE Model rules until final regulations are published in the Federal Register. The transition relief is limited to an additional year to minimize potential double deduction outcomes.  

Taxpayers should continue to monitor the outstanding portions of the 2024 regulations and, further, the incoming Trump administration’s responses to the final regulations. 

See also 

• Cross-border Tax Talks: No double dipping! US proposes new regulations (September 2024) 
• Tax Insight: Highlights of the proposed regulations on dual consolidated losses and certain disregarded payments (August 8, 2024) 
• Tax Insight: Treasury releases guidance on the GloBE rules and foreign tax credit (December 11, 2023) 
• Tax Policy Alert: OECD releases further Pillar Two GloBE Administrative Guidance and timeline update for Pillar One (December 20, 2023)