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Final DCL Regulations and Disregarded Transaction Guidance

The IRS has issued final regulations on dual consolidated losses and certain disregarded transactions.

The IRS released final regulations regarding treatment of certain disregarded transactions and dual consolidated losses under Section 1503(d).

The final regulations finalize some, but not all, of the provisions of the proposed regulations1 that were released in August 2024. Key provisions finalized include:

  • Rules related to disregarded payment losses (DPL), mandating U.S. corporations to include certain disregarded payments into income calculations.
  • An anti-avoidance rule for DCLs and DPLs stipulating that adjustments may be necessary for transactions executed for the purpose of avoiding the DCL provisions of Section 1503(d).
  • A deemed ordering rule designed to prevent a double deduction outcome in both foreign and domestic jurisdictions.
  • A de minimis exception for royalties paid under a license agreement executed prior to August 2024, exempting them from the DPL rules, provided certain requirements are met.
  • Clarification of the definition of disregarded payment entity (DPE), specifying that a foreign branch or foreign partnership held by a U.S. corporation through an entity taxed as a partnership, or through a tiered partnership structure, may be classified as a DPE for U.S. tax purposes.

Notably, the final regulations did not finalize the proposed rules that would modify the DCL rules to provide for “foreign use” of a DCL as a result jurisdictional blending under OECD’s Pillar Two regime. Rather, the final regulations extend transitional relief for certain foreign taxes so as not to consider the top-up taxes collected under Pillar Two when calculating losses incurred in taxable years beginning before August 31, 2025.

Effective Dates

  • The final regulations are effective after January 10, 2025.
  • The DPL rules apply to tax years of DPE owners beginning on or after January 1, 2026.
  • DCL anti-avoidance rule: apply to DCLs incurred in tax years ending on or after August 6, 2024.

Contact a Forvis Mazars professional to learn more.

  • 1Read More on the provisions included in the proposed regulations that were not finalized.

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