IRS issues proposed regs on dual consolidated losses

The IRS released proposed regulations (REG-105128-23) on Aug. 6 that address certain issues arising under the dual consolidated loss (DCL) rules, including intercompany transactions and items arising from stock ownership in calculating a DCL. The proposed regulations also address the application of the DCL rules to Pillar 2 taxes and include a new system of rules addressing certain disregarded payments that give rise to losses for foreign tax purposes.

Congress enacted the DCL rules to prevent a separate unit (including a foreign branch) from “double dipping.” Double dipping occurs when a separate unit uses a single economic loss to offset income in two tax jurisdictions. A DCL, as defined by Section 1503(d)(2)(A), is a net operating loss (NOL) incurred by a U.S. corporation that is subject to income tax in a foreign country or taxed on a residence basis in that foreign jurisdiction. Under these rules, if a U.S. corporation is also taxed in a foreign jurisdiction and has an NOL, the U.S. corporation has a DCL and must comply with the regulations under Section 1503(d).

The DCL rules primarily restrict the “domestic use” of a DCL, which is considered to occur when the DCL is made available to offset, directly or indirectly, the income of a domestic affiliate either in the taxable year in which the DCL is recognized, or in any other taxable year.

The proposed regulations provide guidance in several key areas, including:

• Interaction with intercompany transaction regulations: The proposed regulations amend Treas. Reg. Sec. 1.1502-13 to clarify the treatment of items that are subject to the Section 1503(d) rules and the intercompany transaction regulations.
• Interaction with the Pillar 2 GloBE model rules: The proposed regulations provide guidance on applying DCL rules within the context of the GloBE model rules, including treating a top-up tax imposed and collected under a qualified domestic minimum top-up tax or the income inclusion rule as income tax for DCL purposes, and extending the transitional relief for “legacy DCLs” provided in Notice 2023-80. See our prior coverage on the notice here. The proposed regulations also provide a limited foreign use exception under which there is deemed to be no foreign use with respect to the GloBE model rules where the Transitional Country-by-Country reporting (CbCR) Safe Harbor is satisfied, and no foreign use occurs with respect to the Transitional CbCR Safe Harbor due to the application of the duplicate loss arrangement rules.
• Changes to stock ownership rules: The proposed regulations would change the rules on computing income or a DCL, specifying that items arising from the ownership of stock (e.g., gain recognized on the sale of stock, dividends including subpart F and GILTI inclusion) are not taken into account for purposes of computing income or a DCL, with an exception for portfolio stock.
• Disregarded payment losses: The proposed regulations include a new, complex set of rules addressing “disregarded payment losses.” Under these rules, a domestic corporation must “consent” that it will monitor a net loss of the entity under a foreign tax law that is composed of certain payments that are disregarded for U.S. tax purposes and, if a deduction/no-inclusion outcome occurs as to the loss, include in gross income an amount equal to the loss.
  

The proposed regulations generally apply to taxable years ending on or after Aug. 6, 2024. However, certain provisions have different, specific applicability dates. For example, the proposed rule related to the deemed consent for the application of the disregarded payment loss rules is proposed to apply on or after Aug. 6, 2025.

Impacted taxpayers should immediately evaluate the potential impacts of the proposed regulations on their facts and circumstances.

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