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Proposed regulations on hybrid dividends, payments provision pending OIRA review

Hybrid dividends, payments provision OIRA review

OMB’s Office of Information and Regulatory Affairs (OIRA) today acknowledged receipt of proposed regulations from the Treasury Department as guidance concerning the hybrid dividends and payments provision under the new U.S. tax law (Pub. L. No. 115-97, enacted December 22, 2017), the law that is at times referred to as the “Tax Cuts and Jobs Act” (TCJA).

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OIRA review

Treasury regulations that are identified as “major” regulations are subject to review by OMB’s OIRA before issuance, pursuant to Executive Order 13771. Read TaxNewsFlash

The U.S. Treasury Department and IRS would be expected to release the following proposed regulations once OIRA review is completed (as described on the OIRA website):

Regulations addressing certain related party amounts paid or accrued in hybrid transactions or with hybrid entities.

A notation on the OIRA website indicates that these proposed regulations are designated for “expedited review."

Hybrid dividends and payments, limited deduction of certain related-party amounts

The new law disallows a deduction for any disqualified related-party amount paid or accrued pursuant to a hybrid transaction, or by, or to, a hybrid entity.

A disqualified related-party amount is any interest or royalty paid or accrued to a related party if (1) there is no corresponding income inclusion to the related party under local tax law or (2) such related party is allowed a deduction with respect to the payment under local tax law.

A disqualified related-party amount does not include any payment to the extent such payment is included in the gross income of a U.S. shareholder under section 951(a) (i.e., a “subpart F” inclusion). A related party for these purposes is determined by applying the rules of section 954(d)(3) to the payor (as opposed to the CFC referred to in such section).

A hybrid transaction is any transaction, series of transactions, agreement, or instrument under which one or more payments are treated as interest or royalties for federal income tax purposes but are not so treated for purposes of the tax law of the foreign country of which the entity is resident or is subject to tax.

A hybrid entity is one that is treated as fiscally transparent for federal income tax purposes (e.g., a disregarded entity or partnership) but not for purposes of the foreign country of which the entity is resident or is subject to tax (hybrid entity), or an entity that is treated as fiscally transparent for foreign tax law purposes but not for federal income tax purposes (reverse hybrid entity).

The new law also grants the Secretary authority to issue regulations or other guidance necessary or appropriate to carry out the purposes of the provision and sets forth a broad list of issues such guidance may address. Such guidance may provide rules for the following:

  • Denying deductions for conduit arrangements that involve a hybrid transaction or a hybrid entity
  • Applying the provision to branches or domestic entities
  • Applying the provision to certain structured transactions
  • Denying some or all of a deduction claimed for an interest or a royalty payment that, as a result of the hybrid transaction or entity, is included in the recipient’s income under a preferential tax regime of the country of residence of the recipient and has the effect of reducing the country’s generally applicable statutory tax rate by at least 25%
  • Denying a deduction claimed for an interest or a royalty payment if such amount is subject to a participation exemption system or other system that provides for the exclusion of a substantial portion of such amount
  • Determining the tax residence of a foreign entity if the entity is otherwise considered a resident of more than one country or of no country
  • Exceptions to the provision’s general rule to (1) cases in which the disqualified related-party amount is taxed under the laws of a foreign country other than the country of which the related party is a resident for tax purposes, and (2) other cases that the Secretary determines do not present a risk of eroding the U.S. income tax base
  • Requirements for record keeping and information reporting in addition to any requirements imposed by section 6038A

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