Tax News Update    Email this document    Print this document  

Today, the IRS issued proposed regulations (REG-104352-18) that would implement the anti-hybrid-mismatch rules under Sections 245A(e) and 267A, which were enacted under the law known as the "Tax Cuts and Jobs Act" (TCJA). The proposed regulations also include rules under Sections 1503(d), 6038, 6038A and 7701.

Generally, the proposed regulations under Section 267A would deny a deduction for interest and royalty payments that are paid to a related party but not included in the related party's income due to: (1) a hybrid transaction, or (ii) a payment by or to a hybrid entity. Additionally, the Section 267A proposed regulations would:

• Clarify the scope of Section 267A as applying only to deductions of payments made to related parties, unless the deduction is under a "structured arrangement"
• Limit Section 267A's application to deduction/no inclusion outcomes that result from hybridity
• Address when Section 267A applies to payments to a reverse hybrid
• Exempt certain payments included in the income of a US tax resident or taken into account under the subpart F or global intangible low-taxed income rules
• Define royalty (by reference to the US Model Treaty) and interest (generally, corresponding to the definition in the proposed regulations under Section 163(j))
• Likely apply to payments made in tax years beginning after December 31, 2017

The Section 245A(e) proposed regulations provide guidance on hybrid dividends. Additionally, the proposed regulations would:

• Provide guidance on distributions of previously taxed income (PTI) by a first-tier CFC to its US shareholder and tiered hybrid dividend payments of PTI (i.e., paid from a lower-tier CFC to an upper-tier CFC)
• Create the concept of a hybrid dividend account to ensure that dividends either result in subpart F income or are ineligible for the Section 245A dividends received deduction, regardless of whether the same payment gives rise to the dividend and the hybrid deduction
• Likely be finalized by June 22, 2018 and to apply to payments made after December 31, 2017

The Section 1503(d) proposed regulations would amend the treatment of domestic reverse hybrids to bring them within the scope of Section 1503(d) when the owner of the domestic reverse hybrid is a related foreign person.

A Tax Alert on the regulations is forthcoming and a webcast invitation will be sent soon.