Today, the Treasury Department released final regulations (TD 9896) implementing the hybrid mismatch rules under IRC Sections 245A(e) and 267A, and making changes to the dual consolidated loss (DCL) rules under IRC Section 1503(d). The final regulations, which are primarily targeted at so-called "deduction - no inclusion" outcomes, retain the basic approach and structure of the proposed regulations issued in December 2018 with certain revisions (see Tax Alert 2019-0036  for discussion of proposed regulations). The IRS also released proposed regulations (REG-106013-19) providing guidance on hybrid deduction accounts and conduit financing arrangements involving equity interests.

IRC Section 267A, DCL and anti-conduit provisions

The final IRC Section 267A regulations include the following significant changes:

• Clarify that the rules can apply to interest-free loans and similar arrangements (applicable for tax years beginning on or after December 20, 2018)
• Modify the "imported mismatch" rules (aimed at preventing the effects of an offshore hybrid arrangement from being imported into the US) and include a list of hybrid deductions limiting their scope
• Narrow the definition of interest, which may foreshadow a similar approach in the final IRC Section 163(j) regulations, which have yet to be released

The final DCL regulations are largely unchanged from the proposed regulations. The Preamble notes that the IRS and Treasury continue to study structures involving payments from foreign disregarded entities to their domestic corporate owners and may issue guidance in the future.

The proposed regulations would expand the conduit financing rules under Treas. Reg. Section 1.881-3 to now capture certain hybrid instrument arrangements that permit deductions under foreign law.

IRC Section 245A(e) provisions

The final IRC Section 245A(e) regulations make the following significant changes:

• Treat "notional interest deductions" allowed to a CFC as hybrid deductions that are taken into account for this purpose only for foreign tax years beginning on or after December 20, 2018 (rather than on or after December 31, 2017, as in the proposed regulations)
• Revise the applicability date so that the final regulations apply to distributions made after December 31, 2017, but only if the distributions occurred during tax years ending on or after December 20, 2018
• Provide for a new anti-duplication rule that would reduce the amount of hybrid deductions of a lower-tier CFC by hybrid deductions of an upper-tier CFC in certain back-to-back financing transactions

The proposed regulations provide rules on adjustments to hybrid deduction accounts to reflect Subpart F, GILTI and certain IRC Section 956 inclusions.

A detailed Tax Alert on the final and proposed regulations is forthcoming.