On August 20, 2025, the United States (US) Department of Treasury (Treasury) and the Internal Revenue Service (IRS) announced in the Notice their intent to issue proposed regulations that will withdraw the DPL rules and the modifications recently made to the DCL "deemed ordering" rule under Treas. Reg. 1.1503(d)-3(c)(3).

The proposed regulations also would extend the transitional relief regarding the interaction of the DCL rules with the GloBE Rules to tax years beginning before January 1, 2028.

The Notice anticipates that the forthcoming proposed regulations will apply to tax years beginning on or after January 1, 2026 and states that taxpayers may rely on the Notice until the proposed regulations are published. The Notice requests comments on potential revisions to the "all or nothing" principle and how disregarded items should be taken into account for purposes of the DCL rules. Comments are due by October 21, 2025.

Background

DCL and DPL rules

The DCL rules are a component of the US anti-hybrid regime, which limits the use of a single economic loss to offset income subject both to US tax and foreign tax. A double deduction outcome may occur when a domestic corporation is also resident in a foreign jurisdiction (a dual resident corporation) or when a domestic corporation holds an interest in a hybrid entity or foreign branch. Under IRC Section 1503(d), a DCL of a domestic corporation cannot reduce the taxable income of a domestic affiliate (a domestic use). For this purpose, a DCL is generally (i) the net operating loss (NOL) attributable to a dual resident corporation, or (ii) the net loss attributable to a domestic corporation's separate unit (which includes certain hybrid entities and foreign branches). There are exceptions to this limitation on the domestic use of a DCL, including when a taxpayer certifies under a "domestic use election and agreement" that there has not been and will be no foreign use of the DCL. A foreign use occurs when any portion of a DCL is made available under the income tax laws of a foreign country to reduce income of certain foreign persons (e.g., a foreign entity that is a corporation for US tax purposes).

Treasury and the IRS first introduced the DPL rules in the 2024 proposed regulations (REG-105128-23; Proposed Regulations), and subsequently implemented these rules with some modifications in the January DPL/DCL Regulations (T.D. 10026). The DPL rules are a secondary response to double non-taxation outcomes that may arise from certain payments that are deductible in a foreign country and are disregarded for US tax purposes. The preamble to the January DPL/DCL Regulations said that the DPL rules are designed to prevent certain disregarded entity classifications from avoiding the application of the DCL rules.

The DPL rules generally require a domestic owner (DPE Owner) of a disregarded payment entity (DPE) to include in gross income a DPL to which a triggering event occurs during a 60-month certification period. The income inclusion equals the DPL, reduced to the extent of the positive balance (if any) in the DPL cumulative register, which is an account that includes disregarded payment income (DPI) but no other income. For more on the computation of a DPE's DPI or DPL, see Tax Alert 2025-0288. The DPL rules apply to tax years beginning on or after January 1, 2026.

The January DPL/DCL Regulations also modified a "deemed ordering rule," which applies for both DCL and DPL purposes. The first modification removed the restriction limiting the application of the rule to situations in which foreign law does not provide specific rules for determining which income is offset by losses or deductions composing a DCL or DPL. The second modification limited the deemed ordering rule by considering only items of income or gain that would be taken into account in determining the DCL (that is, regarded items) for purposes of applying the deemed ordering rule to DCLs. Similarly, for DPLs, the only relevant items are those that are or would be taken into account for determining a DPL or DPI (that is, disregarded interest or royalties).

Interactions between the DCL and GloBE rules

The top-up taxes under the OECD's Global Anti-Base Erosion Model Rules (GloBE Rules) apply on a jurisdictional basis by generally aggregating the income and loss of constituent entities in the same jurisdiction for purposes of determining the ETR, and ultimately the top-up tax for that jurisdiction. In Notice 2023-80, Treasury and the IRS indicated that this jurisdictional "blending" approach may result in double-dipping issues that the DCL rules were designed to prevent. They further noted that they were evaluating whether the jurisdictional blending under the GloBE Rules should constitute a foreign use of a DCL.

As part of Notice 2023-80, Treasury announced a transition rule under which no foreign use of a DCL would occur from taking a "legacy DCL" into account under the GloBE Rules. Notice 2023-80 generally defined a legacy DCL as a DCL incurred in a tax year before the effective date of the GloBE Rules. The Proposed and January DPL/DCL Regulations extended this transition rule to tax years beginning before August 31, 2025.

The Notice

Removal of the DPL rules

After the Proposed Regulations and the January DPL/DCL Regulations were published, Treasury and the IRS received comments advocating for the removal of the DPL rules. These comments centered around the complexity of the DPL rules, the costs of complying with the rules and restructuring existing arrangements, and the authority for the DPL rules. Specifically, commentors stated that neither IRC Section 1503(d) nor the regulations under IRC Section 7701 authorize income inclusions for disregarded payments that do not otherwise exist for US tax purposes.

The Notice indicates that Treasury and IRS share these concerns and agree that the interaction of the IRC Section 1503(d) and IRC Section 7701 provisions should not be interpreted as requiring disregarded payments to give rise to income inclusions.

Therefore, Treasury and the IRS announced that they intend to issue proposed regulations that would remove the DPL rules. These proposed regulations would also add an exception to the DCL anti-avoidance rule, so that it does not apply to structures that would have been covered by the DPL rules.

Modifications to the deemed ordering rule

The Notice also provides that the forthcoming proposed regulations would remove the modifications introduced by the January DPL/DCL Regulations to the deemed ordering rule in Treas. Reg. 1.1503(d)-3(c)(3).

Extension of transition relief

The Notice extends the GloBE top-up tax transition rule to tax years starting before January 1, 2028. Therefore, Pillar 2 top-up taxes will not trigger a foreign use of a DCL in those tax years. The Notice explains that the extension is intended to allow for further consideration of public comments on the Proposed Regulations and ongoing developments at the OECD, and to provide taxpayers with greater certainty.

Applicability dates

The Notice anticipates that the forthcoming proposed regulations addressing these items would apply to tax years beginning on or after January 1, 2026. Additionally, taxpayers may rely on the guidance in the Notice until proposed regulations are published. Thus, taxpayers may treat the DPL rules as having never been in effect.

Implications

The Notice offers welcome relief for taxpayers with financing or licensing transactions involving US-owned disregarded entities or foreign branches, that might otherwise have been subject to income inclusions under the DPL rules. Additionally, eliminating the DPL rules removes the complex compliance obligations and costs that these provisions would have required of taxpayers. Further, the new exception to the DCL anti-avoidance rule promotes certainty by removing the possibility that the rule would be applied to address potential double non-taxation outcomes resulting from payments that are disregarded for US tax purposes and deductible for foreign tax purposes (including notional interest deductions).

Treasury and the IRS stated in the Notice that they will continue to review the application of the deemed ordering rule. At present, it's unclear whether they will reinstate the requirement restricting its use to cases where foreign law lacks guidance on offsetting income with losses or deductions. It is also unclear whether future guidance will address the extent to which items of deduction or loss composing a DCL may be treated as offset by foreign law items of income or gain that are disregarded for US tax purposes. An offset convention would reduce foreign uses of DCLs, for example, by generally treating no foreign use as occurring if the relevant entity has net positive income under the foreign tax law.

The Notice also indicates that Treasury and the IRS are studying the "all or nothing" principle for potential revision. If changes are introduced, those modifications could significantly limit, among other things, the recapture consequences that occur when a taxpayer has made a domestic use election and then foreign use subsequently and unexpectedly occurs.

Finally, the Notice removes taxpayer concerns that Qualified Domestic Minimum Top-Up Taxes (QDMTTs), or other GloBE top-up taxes, would potentially be considered a foreign use of a DCL for tax years ending on or before December 31, 2027.