Final Regs Provide Guidance on Some Hybrid Arrangements

Final Regs Provide Guidance on Some Hybrid Arrangements

Internal Revenue Service

The IRS has published final regulations (T.D. 9896) providing guidance on hybrid dividends and some amounts paid or accrued under hybrid arrangements, which generally involve arrangements in which U.S. and foreign tax law classify a transaction or entity differently for tax purposes. Effective April 8, 2020, the final regs adopt proposed regs (<a href="/lr/resolve//28q3t">REG-104352-18</a>) issued in December 2018. The final regs retain the basic approach and structure of the proposed regs, with some changes. The regs provide clarity to taxpayers on determining and tracking hybrid dividends and on the disallowance of deductions for interest or royalties paid as a result of hybrid or branch arrangements. The final regs clarify that a deduction or other tax benefit may be a hybrid deduction regardless of whether it is used currently under the relevant foreign tax law. The regs also clarify that a determination of whether a deduction or other tax benefit is allowed is made without regard to a rule that disallows or suspends deductions if a specified ratio or percentage is exceeded. The regs provide that in some cases, the determination of whether a relevant foreign tax law allows a deduction or other tax benefit for an amount is made without regard to the application of foreign hybrid mismatch rules. The regs generally retain the proposed approach to treat notional interest deductions (NIDs) as hybrid deductions but only for NIDs allowed to a controlled foreign corporation for tax years beginning after December 19, 2018. The regs clarify the operation of a special rule that was proposed to ensure that deductions or other tax benefits allowed under some integration or imputation systems do not constitute hybrid deductions. Under the proposed regs, a hybrid deduction of a CFC includes some deductions or other tax benefits allowed under a relevant foreign tax law to a person related to the CFC. The final regs retain the related-person rule, with some clarifications. The preamble notes that final regs under section 954(d)(3) narrow the definition of relatedness for purposes of that section. Under the final regs, a relevant foreign tax law may include a tax law of a political subdivision or other local authority of a foreign country. Treasury and the IRS have simultaneously released proposed regs (<a href="/lr/resolve//2cczj">REG-106013-19</a>) reflecting their determination that in some cases, hybrid deduction accounts for CFC stock should be reduced. For purposes of hybrid deduction accounts, the final regs incorporate some changes and clarifications to the proposed rules that take into account transfers of CFC stock and that address midyear stock transfers. The final regs provide that the hybrid deduction account rules apply to distributions made after December 31, 2017, if they occur during tax years ending on or after the date the proposed regs were issued. The regs provide that the tiered hybrid dividend rule applies only to a domestic corporation that is a U.S. shareholder of both the upper- and lower-tier CFC. The regs retain an antiavoidance rule with changes, so that it won’t apply to disregard a restructuring of a hybrid arrangement into a non-hybrid arrangement. The proposed regs disallowed a deduction for specified payments. For purposes of hybrid and branch arrangements, the final regs retain the proposed long-term deferral provisions, with some changes and clarifications in response to comments, including exempting hybrid sale/license transactions from the hybrid transaction rule. The regs also make some changes and clarifications regarding interest-free loans, disregarded payments, payments to U.S. taxable branches, and reverse hybrids. Regarding exceptions for disqualified hybrid amounts, the regs incorporate some suggested revisions to the rules that apply for amounts included in income in the United States. The final regs retain the imported mismatch rule, with some changes to reduce complexity and facilitate compliance and administration of the rule. Addressing other issues, the final regs modify the definition of interest for section 267A purposes, modify the definition of a structured payment, provide how section 267A applies to a structured payment, and incorporate suggested changes to the structured arrangement rule and the de minimis exception that exempts a specified party from the application of section 267A in some cases. The regs also clarify that section 267A applies to a specified payment before section 163(j) applies to the payment and make antiavoidance rule changes. The final regs provide rules regarding dual consolidated losses and entity classifications to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign jurisdiction. The regs retain the proposed approach regarding domestic reverse hybrids. Treasury and the IRS continue to study disregarded payment structures and issues regarding the section 1503(d) rules.

(1) At 85 FR 47027, August 4, 2020, the IRS made a <a href="/lr/resolve/correction/2csk2" id="2cczg-0000025" title="correction">correction</a> to the following Treasury Decision which has been incorporated below. (2) At 85 FR 48651, August 12, 2020, the IRS made <a href="/lr/resolve/corrections/2ctpp" id="2cczg-0001166" title="corrections">corrections</a> to the following Treasury Decision and the changes have been incorporated in the associated regulations.

The IRS has published final regulations (T.D. 9896) providing guidance on hybrid dividends and some amounts paid or accrued under hybrid arrangements, which generally involve arrangements in which U.S. and foreign tax law classify a transaction or entity differently for tax purposes.

The IRS has published final regulations (T.D. 9896) providing guidance on hybrid dividends and some amounts paid or accrued under hybrid arrangements, which generally involve arrangements in which U.S. and foreign tax law classify a transaction or entity differently for tax purposes. Effective April 8, 2020, the final regs adopt proposed regs (REG-104352-18) issued in December 2018. The final regs retain the basic approach and structure of the proposed regs, with some changes. The regs provide clarity to taxpayers on determining and tracking hybrid dividends and on the disallowance of deductions for interest or royalties paid as a result of hybrid or branch arrangements. The final regs clarify that a deduction or other tax benefit may be a hybrid deduction regardless of whether it is used currently under the relevant foreign tax law. The regs also clarify that a determination of whether a deduction or other tax benefit is allowed is made without regard to a rule that disallows or suspends deductions if a specified ratio or percentage is exceeded. The regs provide that in some cases, the determination of whether a relevant foreign tax law allows a deduction or other tax benefit for an amount is made without regard to the application of foreign hybrid mismatch rules. The regs generally retain the proposed approach to treat notional interest deductions (NIDs) as hybrid deductions but only for NIDs allowed to a controlled foreign corporation for tax years beginning after December 19, 2018. The regs clarify the operation of a special rule that was proposed to ensure that deductions or other tax benefits allowed under some integration or imputation systems do not constitute hybrid deductions. Under the proposed regs, a hybrid deduction of a CFC includes some deductions or other tax benefits allowed under a relevant foreign tax law to a person related to the CFC. The final regs retain the related-person rule, with some clarifications. The preamble notes that final regs under section 954(d)(3) narrow the definition of relatedness for purposes of that section. Under the final regs, a relevant foreign tax law may include a tax law of a political subdivision or other local authority of a foreign country. Treasury and the IRS have simultaneously released proposed regs (REG-106013-19) reflecting their determination that in some cases, hybrid deduction accounts for CFC stock should be reduced. For purposes of hybrid deduction accounts, the final regs incorporate some changes and clarifications to the proposed rules that take into account transfers of CFC stock and that address midyear stock transfers. The final regs provide that the hybrid deduction account rules apply to distributions made after December 31, 2017, if they occur during tax years ending on or after the date the proposed regs were issued. The regs provide that the tiered hybrid dividend rule applies only to a domestic corporation that is a U.S. shareholder of both the upper- and lower-tier CFC. The regs retain an antiavoidance rule with changes, so that it won’t apply to disregard a restructuring of a hybrid arrangement into a non-hybrid arrangement. The proposed regs disallowed a deduction for specified payments. For purposes of hybrid and branch arrangements, the final regs retain the proposed long-term deferral provisions, with some changes and clarifications in response to comments, including exempting hybrid sale/license transactions from the hybrid transaction rule. The regs also make some changes and clarifications regarding interest-free loans, disregarded payments, payments to U.S. taxable branches, and reverse hybrids. Regarding exceptions for disqualified hybrid amounts, the regs incorporate some suggested revisions to the rules that apply for amounts included in income in the United States. The final regs retain the imported mismatch rule, with some changes to reduce complexity and facilitate compliance and administration of the rule. Addressing other issues, the final regs modify the definition of interest for section 267A purposes, modify the definition of a structured payment, provide how section 267A applies to a structured payment, and incorporate suggested changes to the structured arrangement rule and the de minimis exception that exempts a specified party from the application of section 267A in some cases. The regs also clarify that section 267A applies to a specified payment before section 163(j) applies to the payment and make antiavoidance rule changes. The final regs provide rules regarding dual consolidated losses and entity classifications to prevent the same deduction from being claimed under the tax laws of both the United States and a foreign jurisdiction. The regs retain the proposed approach regarding domestic reverse hybrids. Treasury and the IRS continue to study disregarded payment structures and issues regarding the section 1503(d) rules.

Sec. 245A Deduction for foreign source-portion of dividends received by domestic corporations from specified 10-percent owned foreign corporations.

Sec. 267A Certain related party amounts paid or accrued in hybrid transactions or with hybrid entities

Sec. 1503 Computation and payment of tax

Sec. 6038 Information reporting with respect to certain foreign corporations and partnerships

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Final Regs Provide Guidance on Some Hybrid Arrangements