On December 6, 2016, the Treasury Department and the IRS issued temporary and proposed regulations under Section 901(m). That section, enacted in 2010, limits the creditability of disqualified foreign income taxes following a covered asset acquisition (CAA).

The temporary regulations are generally consistent with prior guidance, except that they exclude withholding taxes from the category of disqualified foreign income taxes, as withholding taxes are gross basis taxes that are generally unaffected by changes in asset bases. (For a detailed discussion of the prior guidance, see Tax Alert 2014-1334.) The temporary regulations generally apply to CAAs occurring on or after July 21, 2014, but also have limited applicability to transactions occurring after January 1, 2011.

The proposed regulations provide comprehensive guidance under Section 901(m). They would also add three new categories of transactions to the current list of CAA transactions. The new categories consist of:

(1) Transactions treated as asset acquisitions for US income tax purposes and as acquisitions of an interest in a fiscally transparent entity for foreign income tax purposes

(2) Transactions treated as partnership distributions for US income tax purposes, under which an asset's basis increases in the hands of either the distributee partner or the partnership

(3) Transactions treated as asset acquisitions for both US income tax purposes and foreign income tax purposes

The second and third categories would apply only if there were an increase to US tax basis without a corresponding increase to foreign tax basis.

The proposed regulations will be effective on the date they are published as final regulations in the Federal Register.

A Tax Alert is forthcoming.