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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

HIGHLIGHTS
OF THIS ISSUE




Bulletin No. 2025–9
February 24, 2025

These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.

EMPLOYEE PLANS, EXCISE TAX
REG-110878-24, page 979.

This document withdraws a notice of proposed rulemaking
that appeared in the Federal Register on October 28, 2024,
regarding coverage of certain preventive services under the
Affordable Care Act.

ESTATE TAX, GIFT TAX
T.D. 10027, page 897.

The final Treasury Decision provides guidance for section
2801, which was added to the Internal Revenue Code by section 301 of the Heroes Earnings Assistance and Relief Tax
Act of 2008, Public Law 110–245 (122 Stat. 1624), effective
June 17, 2008. Section 2801, which is the sole section of
new Chapter 15 of subtitle B (relating to taxes on transfers
of property), imposes a transfer tax on U.S. citizens and residents, including trusts, who receive, directly or indirectly, covered gifts and covered bequests from covered expatriates.

INCOME TAX
REG-107895-24, page 972.

These proposed regulations provide guidance regarding the
base erosion and anti-abuse tax imposed on certain large
corporate taxpayers with respect to certain payments made
to foreign related parties. The proposed regulations would
affect corporations with substantial gross receipts that make
payments to foreign related parties.

Finding Lists begin on page ii.

T.D. 10026, page 878.

This document contains final regulations regarding certain
disregarded payments that give rise to deductions for foreign tax purposes and potential double non-taxation of
income. The final regulations affect domestic corporate owners that make or receive such payments. This document also
announces additional transition relief for the application of
the dual consolidated loss (“DCL”) rules to certain foreign
taxes that are intended to ensure that multinational enterprises pay a minimum level of tax.

T.D. 10029, page 936.

This document contains final regulations that identify transactions that are the same as, or substantially similar to, certain
micro-captive transactions as listed transactions, a type of
reportable transaction, and certain other micro-captive transactions as transactions of interest, another type of reportable transaction.

The IRS Mission
Provide America’s taxpayers top-quality service by helping
them understand and meet their tax responsibilities and
enforce the law with integrity and fairness to all.

Introduction
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly.
It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of
internal practices and procedures that affect the rights and
duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service
on the application of the law to the pivotal facts stated in
the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature are
deleted to prevent unwarranted invasions of privacy and to
comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B,
Legislation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative
Rulings. Bank Secrecy Act Administrative Rulings are issued
by the Department of the Treasury’s Office of the Assistant
Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

February 24, 2025 

Bulletin No. 2025–9

Part I
T.D. 10026
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
Rules Regarding Certain
Disregarded Payments and
Dual Consolidated Losses
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final rule.
SUMMARY: This document contains
final regulations regarding certain disregarded payments that give rise to deductions for foreign tax purposes and avoid
the application of the dual consolidated
loss (“DCL”) rules. The final regulations
affect domestic corporate owners that
make or receive such payments. This document also announces additional transition
relief for the application of the DCL rules
to certain foreign taxes that are intended to
ensure that multinational enterprises pay a
minimum level of tax.
DATES: Effective date: These regulations
are effective on January 10, 2025.
Applicability dates: For dates of applicability, see §§ 1.1503(d)-8(b)(11), (15),
(17), and (18), and 301.7701-2(e)(10).
FOR FURTHER INFORMATION
CONTACT: Andrew L. Wigmore at
(202) 317-5443 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains amendments
to 26 CFR parts 1 and 301 (the “final
regulations”) under sections 1503(d) and
7701 of the Internal Revenue Code (the

“Code”). The final regulations are issued
pursuant to the express delegations of
authority under section 7805(a), which
authorizes the Secretary of the Treasury
(the “Secretary”) to “prescribe all needful
rules and regulations for the enforcement”
of the Code, section 1503(d)(2)(B), which
authorizes the Secretary to provide exceptions to the term “dual consolidated loss,”
and section 1503(d)(3), which authorizes
the Secretary to address losses of “separate units.”
Background
On December 11, 2023, the Department of Treasury (“Treasury Department”) and the IRS released Notice 202380, 2023-52 IRB 1583, which, among
other things, described the interaction of
the DCL rules with model rules published
by the OECD/G20 Inclusive Framework
on BEPS (the “GloBE Model Rules”)1 and
requested comments on such interaction.
The notice also announced limited transition relief from the application of the DCL
rules to the GloBE Model Rules for “legacy DCLs,” which in general are DCLs
incurred before the effective date of the
GloBE Model Rules.
On August 7, 2024, the Treasury
Department and the IRS published proposed regulations (REG-105128-23) in
the Federal Register (89 FR 64750)
under sections 1502, 1503(d), and 7701
of the Code, with a correction published
in the Federal Register on September 3,
2024 (89 FR 71214) (the “2024 proposed
regulations”), that would address certain
issues arising under the DCL rules. In general, the 2024 proposed regulations would
clarify how the DCL rules interact with
the intercompany transaction rules in §
1.1502-13, modify how items arising from
stock ownership are taken into account
when computing the amount of a DCL,
and address the application of the DCL
rules to foreign taxes that are based on the
GloBE Model Rules. The 2024 proposed
regulations also included disregarded
payment loss (“DPL”) rules, under which

domestic corporations would be required
to include amounts in income in certain
cases involving disregarded payments.
Further, the 2024 proposed regulations
included an anti-avoidance rule applicable
for both DCL and DPL purposes.
This document finalizes certain rules
from the 2024 proposed regulations. These
rules and related comments received in
response to the 2024 proposed regulations are discussed in the Summary of
Comments and Explanation of Revisions
section of this preamble. All comments
are available at https://www.regulations.
gov or upon request. A public hearing was
held on the 2024 proposed regulations
on November 22, 2024, but the speaker
requesting to testify did not attend the
hearing. The Treasury Department and the
IRS intend to finalize, in future guidance,
the remaining rules from the 2024 proposed regulations.
This document also announces additional transition relief for the application
of the DCL rules to foreign taxes that are
based on the GloBE Model Rules. This
relief is discussed in the Additional Transition Relief with respect to the GloBE
Model Rules section of this preamble.
Summary of Comments and
Explanation of Revisions
I. Scope
This document finalizes the rules from
the 2024 proposed regulations that relate
to DPLs, including portions that are also
relevant for DCLs, such as the anti-avoidance rule and the deemed ordering rule.
The document retains the basic approach
and structure of these rules, with certain
revisions.
Part II of the Summary of Comments
and Explanation of Revisions summarizes
the DPL rules, including the purposes
and general approach of the rules under
the 2024 proposed regulations, and discusses related comments and revisions.
Part III discusses comments and revisions
related to rules applicable to both DCLs

See OECD/G20, Tax Challenges Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two). As the context requires, references to the GloBE Model
Rules include references to a foreign jurisdiction's legislation implementing the GloBE Model Rules. Capitalized terms used in this preamble, but not defined herein, have the meanings
ascribed to such terms under the GloBE Model Rules.

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February 24, 2025

878

Bulletin No. 2025–9

and DPLs. Part IV discusses applicability
dates of the final regulations.
II. DPL Rules
A. Overview
The DPL rules are a component of
the entity classification regulations under
§§ 301.7701-1 through 301.7701-3 (the
“check-the-box regulations”). The checkthe-box regulations were intended to
bring simplicity and administrability to
entity classifications under section 7701.
They permit certain business entities to be
classified for U.S. tax purposes as entities
disregarded as separate from their owners. The classification may be determined
either pursuant to default rules or by election. However, the application of these
regulations to foreign entities, particularly where a foreign entity is treated as a
disregarded entity, has led to unintended
tax consequences, including avoidance of
international provisions of the Code. The
purpose of the DPL rules is to prevent certain arrangements involving disregarded
entity classifications from avoiding the
DCL rules.
As an example, when a domestic
corporation borrows from a bank and
on-lends the loan proceeds to its foreign
disregarded entity, the single economic
borrowing could give rise to deductions
under both U.S. tax law (for interest payments to the bank) and foreign tax law (for
interest payments to the domestic corporation). As a result, if the U.S. deduction
is used to offset U.S. income that is not
subject to foreign tax, and the foreign tax
deduction generates a foreign loss that is
used to offset foreign income that is not
subject to U.S. tax (for example under a
consolidation regime), then the single
economic borrowing would give rise to a
double deduction outcome. Such double
deduction outcome, however, would not
be addressed by the existing DCL rules
because the loss of the disregarded entity
would not be recognized for U.S. tax
purposes. Conversely, if the disregarded
entity’s interest payments were regarded
for U.S. tax purposes (for example, if the

arrangement involved direct financing
of the disregarded entity by the bank),
the loss would be subject to the existing
DCL rules. This avoidance of the DCL
rules is an unintended consequence of the
check-the-box regulations which, as noted
above, were issued for the simplification
and administrability of entity classification determinations.
The DPL rules are intended to address
these concerns by (i) tracking whether
certain payments involving a disregarded
entity and its owner give rise to potential double deduction outcomes, and (ii)
neutralizing any resulting double deduction outcome through an income inclusion similar to the one that that the owner
would have had with respect to the payments had the payments been regarded for
U.S. tax purposes (that is, had the classification as a disregarded entity under the
check-the-box regulations not been taken
into account). As revised under the final
regulations, the DPL rules also treat the
income inclusion as giving rise to a deduction, the use of which is suspended until
the entity takes into account certain disregarded income, with the result that the
rules are consistent with what would have
occurred if certain disregarded payments
were regarded for U.S. tax purposes (as
discussed in part II.F of the Summary of
Comments and Explanation of Revisions).
In this way, the check-the-box regulations
continue to permit certain entities to be
disregarded for U.S. tax purposes (including by election), but such classifications
are subject to new (targeted) rules that
prevent the classifications from giving rise
to avoidance of the DCL rules. Alternative
approaches to addressing these concerns
would include more broadly restricting
disregarded entity classifications (for
example, by requiring a foreign entity to
be classified as an association for U.S. tax
purposes if the entity is a foreign tax resident, or classifying single-owner foreign
entities as associations in all cases).
Under the 2024 proposed regulations,
the DPL rules would apply with respect to
a domestic corporation and a disregarded
entity of the domestic corporation (or a
disregarded entity in which the domestic

corporation indirectly owns an interest)
if transactions involving the entity and
domestic corporation are deductible under
a foreign tax law, such as where the entity
is a tax resident of a foreign country. See
proposed § 301.7701-3(c)(4). In these
cases, the 2024 proposed regulations
described the domestic corporation as
consenting to such application of the DPL
rules (generally by reason of the entity’s
check-the-box election) and generally
referred to the disregarded entity and the
domestic corporation as a disregarded
payment entity (“DPE”) and specified
domestic owner, respectively. See proposed §§ 1.1503(d)-1(d)(1) and 301.77013(c)(4). This document retains the nomenclature of the 2024 proposed regulations,
with certain simplifications or other modifications, such as referring to a specified
domestic owner as a DPE owner and eliminating references to consent (discussed in
part II.B.2 of the Summary of Comments
and Explanation of Revisions).2
Under the proposed DPL rules, the
DPE owner would monitor whether the
DPE incurs a DPL or derives disregarded
payment income (“DPI”). See proposed §
1.1503(d)-1(d)(1). A DPL or DPI would
be determined by taking into account only
certain items under the relevant foreign
tax law (generally interest or royalties)
that are not regarded for U.S. tax purposes.
See proposed § 1.1503(d)-1(d)(6)(ii). The
DPE would have a DPL to the extent that,
under the foreign tax law, its deductions
for such items exceed its income from
such items, and it would have DPI to the
extent the reverse is true. See id. Under the
2024 proposed regulations, a DPE’s cumulative amounts of DPL and DPI would be
tracked in the DPE’s “DPL cumulative
register” through negative and positive
adjustments, respectively, to the register.
See proposed § 1.1503(d)-1(d)(5)(ii).
In the case of a DPL, the DPE owner
generally would disclose the DPL on an
initial certification statement and file
annual certifications for a 60-month
period affirming that the DPL has not
been put to a foreign use. See proposed
§ 1.1503(d)-1(d)(1). A failure to comply with this certification requirement,

The final regulations also clarify that the DPL rules address the avoidance of the DCL rules, which has been described differently in prior guidance. See, for example, REG-104352-18, 83 FR
67612, 67624 (noting that the DCL regulations do not apply to DPL structures, and that such structures give rise to outcomes similar to “D/NI outcomes…and double-deduction outcomes…”)
and REG-105128-23, 89 FR 64750, 64762 (noting that an income inclusion under the proposed DPL rules “generally neutralizes the D/NI outcome”).

2

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879

February 24, 2025

or a foreign use of the DPL within the
certification period (each, a “triggering
event”), would require the DPE owner to
include in gross income the DPL inclusion
amount. See proposed § 1.1503(d)-1(d)
(1) and (3). The DPL inclusion amount
would be equal to the amount of the DPL,
reduced by the positive balance (if any) in
the DPL cumulative register. See proposed
§ 1.1503(d)-1(d)(2) through (5). Requiring the DPL inclusion amount in the year
of the triggering event (rather than the
year in which the DPL is incurred) would
be consistent with the approach under
the current DCL rules and avoids any
administrative or compliance burdens that
could result by instead requiring taxpayers to extend the statute of limitations and
amend tax returns upon a triggering event
of the DPL.
B. Rulemaking authority
1. In general
Comments asserted that the DPL rules
do not reflect a proper exercise of the Treasury Department and the IRS’s rulemaking authority for a variety of reasons.
Some comments claimed that Congress
has not expressed a concern with deduction/no inclusion outcomes arising from
disregarded payments because those types
of outcomes are not explicitly described
in sections 245A(e), 267A, or 1503(d),
the Code’s anti-hybrid provisions. These
comments asserted that the DPL rules in
effect implement the recommendations
from the OECD reports3 relating to disregarded payments but noted that Congress has not adopted those recommendations—whereas Congress did adopt other
OECD recommendations in enacting sections 245A(e) and 267A. The comments
accordingly argued that the 2024 proposed regulations inappropriately circumvent Congress by implementing OECD
policies that Congress has rejected.
Other comments asserted that the DPL
rules have no basis in section 1503(d),
because section 1503(d) operates by disallowing a domestic corporation’s net operating loss. These comments contended

that the DPL rules go beyond what section 1503(d) permits because they impose
an income inclusion (rather than deny a
loss) based on disregarded transactions
that cannot give rise to a net operating
loss (which is computed by reference to
regarded items only). Comments similarly argued that section 7701 provides
no basis for the DPL rules because section 7701 pertains to an entity’s tax classification and does not authorize income
inclusions. One comment also contended
that the Treasury Department and the IRS
cannot rely on section 7805(a)’s general
grant of rulemaking authority for the DPL
rules because section 7805(a) authorizes
the Secretary to issue regulations “for the
enforcement” of the Code, and, according to the comment, the DPL rules do not
relate to any Code provision.
Another set of comments argued that
the DPL rules are arbitrary and capricious.
According to the comments, the DPL rules
address the erosion of foreign tax bases
and thus are not in furtherance of any
recognized U.S. tax policy, which, one
comment stated, has historically permitted taxpayers to reduce their foreign tax
liability. One comment further argued that
taxpayers have a reliance interest on the
certainty afforded by the check-the-box
regulations, which, according to the comment, Congress has impliedly endorsed by
leaving the regulations undisturbed since
their issuance in 1996. The comment
stated that the Treasury Department and
the IRS cannot upset those reliance interests by adding the DPL rules to the checkthe-box regime and asserted that changes
to the regime to address hybridity-related
concerns should not be made absent
direction from Congress. The comment
referred to Notice 98-11, 1998-1 C.B. 433,
and the temporary and proposed regulations issued under the notice that treated
a disregarded entity that engaged in certain transactions as a foreign corporation
for purposes of subpart F of the Code. The
Senate Finance Committee proposed a
six-month moratorium on implementing
the regulations to provide Congress time
to consider the issues. See S. Rept. 105174, at 107-110 (1998).

The Treasury Department and the IRS
disagree with these comments. The DPL
rules prevent certain disregarded entity
classifications from giving rise to avoidance of the DCL rules (as discussed in part
II.A of the Summary of Comments and
Explanation of Revisions). Because these
classifications arise under the check-thebox regulations, revising the regulations
to prevent abuse, other misuse, or unintended consequences that only arise due
to the classification rules under the checkthe-box regime is an appropriate exercise
of the authority underlying the regulations, including the express delegation
of authority under section 7805(a) of the
Code. These revisions generally produce
outcomes consistent with what would
have occurred if certain disregarded payments were regarded for U.S. tax purposes
(as discussed in part II.F of the Summary
of Comments and Explanation of Revisions).
As a limitation on disregarded entity
classifications, the DPL rules are consistent with other special rules in the checkthe-box regulations that regard an entity
for certain limited purposes, while generally retaining the entity’s disregarded
entity classification. For example, disregarded entity status is not respected for
purposes of certain rules related to banking, federal tax liabilities, and employment and excise taxes. See § 301.77012(c)(2)(ii) through (v). Similarly, §
301.7701-2(c)(2)(vi) treats certain domestic disregarded entities as corporations for
purposes of section 6038A to provide the
IRS with access to information to satisfy
its obligations under international agreements and strengthen the enforcement of
U.S. tax laws.
When the check-the-box regulations
were issued, the preamble made clear that
additional rules may be required to prevent
inappropriate outcomes. TD 8697 (61 FR
66584, 66585) (describing that, in light of
the increased flexibility under an elective
regime for entity classifications, the Treasury Department and the IRS will monitor
for, and take appropriate action to address,
results that are inconsistent with the policies and rules of particular Code provi-

See OECD/G20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 2015) (“Hybrid Mismatch Report”) and OECD/G20, Neutralising the
Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS (July 2017) (“Branch Mismatch Report”).
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Bulletin No. 2025–9

sions). Further, the history of Notice 98-11
and the regulations issued thereunder do
not support the conclusion that the Treasury Department and the IRS lack authority for the DPL rules. In fact, the Senate
report specifically stated that the proposed
moratorium on the regulations described
in Notice 98-11 should not be interpreted
as the Treasury Department and the IRS
lacking authority to impose limitations on
disregarded entity classifications. See S.
Rept. 105-174, at 110 (1998).
Moreover, the DPL rules are a reasonable response to significant policy concerns resulting from the check-the-box
regulations. Addressing these concerns by
requiring an income inclusion (that neutralizes the double deduction outcome by,
in effect, offsetting the related deduction
that would otherwise be allowed for U.S.
tax purposes) prevents taxpayers from
circumventing the DCL rules through the
artifice of causing payments to be disregarded. The approach in this rulemaking
maintains the simplicity and flexibility
(including the electivity component) of the
check-the-box regulations while preventing inappropriate outcomes through new
rules with narrow application. Further,
taxpayers that prefer to avoid the application of the DPL rules can do so by restructuring to avoid these inappropriate outcomes, as illustrated in § 1.1503(d)-7(c)
(45) (Example 45). See also parts II.D.1,
II.D.2, II.F, and G.1 of the Summary of
Comments and Explanation of Revisions
(discussing certain revisions in response
to comments, which have the effect of further narrowing and deferring the application of the DPL rules). Thus, by preventing the check-the-box regulations from
enabling inappropriate outcomes, the DPL
rules are a reasonable modification of the
regulations. Furthermore, the Treasury
Department and the IRS disagree that
DPL rules inappropriately promote the
policy underlying the OECD recommendations to address double non-taxation
resulting from hybridity. Instead, the DPL
rules promote the U.S. tax policy underlying section1503(d), which was enacted in
1986 (and modified in a technical correction in 1988), to prevent double deduction
outcomes; the OECD policy that was set
forth in the Hybrids Mismatch Report and
Branch Mismatch Report, issued in 2015
and 2017, respectively, is simply consis-

Bulletin No. 2025–9

tent with the existing, longstanding U.S.
policy.
Finally, the Treasury Department and
the IRS have consistently raised the concern that the check-the-box regulations
could expand the use of hybrid structures. This concern was identified in
Notice 95-14, 1995-14 IRB 7, which first
announced that an elective entity classification regime was under consideration
and solicited comments on the propriety
of extending an elective regime to foreign
entities, noting the increased potential for
hybrid entities. Since then, the check-thebox regime has increased the prevalence of
hybrid structures to an extent not initially
foreseen, and many of these structures are
designed for tax avoidance. The Treasury
Department and the IRS have addressed
this avoidance through targeted rules
where feasible. See, for example, § 1.8941(d)(2)(ii) and TD 8999 (67 FR 40157)
(relating to the use of domestic reverse
hybrid entities to obtain inappropriate
treaty benefits); §§ 1.1503(d)-1(c) and
301.7701-3(c)(3) (relating to the use of
domestic reverse hybrid entities to obtain
double-deduction outcomes). Taxpayers
therefore should not have an expectation
that a disregarded entity classification
can be used to circumvent the DCL rules,
and in any case, the Treasury Department
and the IRS are of the view that any such
expectations would not constitute a significant reliance interest that would caution
against this rulemaking, given the limited
extent to which the DPL rules impose a
condition on certain payments involving
disregarded entities. Reliance interests, if
any, are significantly outweighed by the
need to prevent inappropriate results.
2. Default disregarded entity status and
non-consolidated DPE owners
Comments also asserted that the Treasury Department and the IRS do not have
authority to apply the DPL rules in specific fact patterns. According to these
comments, the DPL rules should not apply
where no entity classification election is
made under § 301.7701-3, such as where a
foreign entity defaults to disregarded entity
classification, because in these cases there
is no affirmative act by reason of which
the taxpayer consents to the application of
the DPL rules. Another comment claimed

881

that the DPL rules should not apply where
the DPE owner is not part of a group that
files a consolidated return, asserting that
sections 1502 and 1503(d) cannot apply
to a corporation that is not a member of a
consolidated group.
The Treasury Department and the IRS
disagree with these comments. As discussed in part II.B.1 of the Summary of
Comments and Explanation of Revisions,
the DPL rules are a component of the
check-the-box regime. Under the checkthe-box regulations, promulgated in 1996,
the Treasury Department and the IRS permit certain entities with a single owner to
choose whether or not to be treated as disregarded as separate from their owner for
most federal income tax purposes. However, even entities that choose to be disregarded as separate from their owner for
most Federal income tax purposes are not
disregarded for all purposes. For example,
these entities are regarded for purposes of
federal income tax liability, excise taxes,
and employment taxes. See § 301.77012(c)(2). The treatment of an entity as disregarded for some purposes and regarded
for other purposes under § 301.7701-2(c)
(2) does not depend on whether the entity
is treated as disregarded pursuant to the
default rules or by election.
Like the other rules in § 301.7701-2(c)
(2) and as discussed in part II.F of the
Summary of Comments and Explanation
of Revisions, the DPL regulations effectively provide that a DPE is regarded for
purposes of recognizing certain interest
and royalty payments between a DPE and
its owner or between a DPE and other
disregarded entities. However, for purposes of administrability, these rules do
not regard the payment more broadly or
require the filing of amended returns to
reflect the revocation of a disregarded
entity classification.
Further, the check-the-box regime is an
elective regime that allows eligible entities
to choose their entity classification. The
check-the-box regulations provide default
classification rules that aim to match taxpayers’ expectations and thus reduce the
number of elections that taxpayers must
file to select their entity classification of
choice. See TD 8797 (61 FR 66584). Thus,
through the check-the-box regulations, an
eligible entity chooses to be classified as a
disregarded entity, regardless of whether

February 24, 2025

that choice occurs by accepting the default
classification (that is, by choosing not to
elect an alternative treatment) or by filing
an election; it is merely the mechanics of
obtaining a disregarded entity classification that differ. On the other hand, absent
regulations under section 7701, no foreign
business entity would generally be treated
as a disregarded entity.
Moreover, applying the DPL rules
without regard to whether disregarded
entity classification is obtained by election
or pursuant to the default rules ensures
consistency. Otherwise, similarly situated
taxpayers could have different outcomes
based solely on whether the entity they
choose to use is an entity that satisfies the
default rule to be treated as a disregarded
entity rather than requiring an election to
achieve that result.
Lastly, the DPL rules are not issued
under section 1502 authority (and section 1503(d) is not limited in application
to consolidated groups). The DPL rules
are issued under the authority of sections 1503(d), 7701, and 7805(a) and are
located under section 1503(d) because the
rules leverage concepts from, and prevent
the avoidance of, the DCL rules.
C. Integration of DPL and DCL regimes
As discussed in part II.C of the Explanation of Provisions of the 2024 proposed regulations, the DPL rules operate independently of the DCL rules. For
example, only items that are regarded for
U.S. tax purposes are taken into account
in computing a DCL (or the DCL cumulative register), and only items that are
disregarded for U.S. tax purposes would
be taken into account in computing a
DPL (or the DPL cumulative register).
The view of the Treasury Department
and the IRS as expressed in the 2024
proposed regulations was that integrating the two regimes would result in
considerable complexity and administrative burden. For example, fully integrating the regimes would likely require
a significantly broader scope of the DPL
rules to take into account all disregarded
payments (consistent with the scope of
the DCL rules, which take into account
all regarded payments) and to take into
account all of the triggering events that
apply with respect to DCLs (rather than

February 24, 2025

only two triggering events that apply
under the DPL rules).
Comments requested integration or
coordination of the DPL rules and DCL
rules, suggesting that an integrated or
coordinated set of rules could ensure
consistent treatment of similar transactions (regardless of whether regarded or
disregarded for U.S. tax purposes) and
simplify compliance. For example, one
comment proposed withdrawing the DPL
rules and revising the DCL rules to ignore
disregarded and intercompany transactions (as defined in § 1.1502-13(b)(1)) in
calculating the amount of a DCL, while
at the same time taking such transactions
into account under a modified DCL register. Specifically, under this approach, a
separate unit would calculate its income
or loss both with and without disregarded
and intercompany transaction items that
offset in amount, with the smaller amount
of income being dual income and thus
increasing the DCL register, or with the
smaller amount of loss being a dual loss
and thus a DCL. The difference between
the with-and-without calculation in a year
would be tracked as an attribute — excess
income or excess loss — for purposes of
applying the with-and-without calculation
in subsequent years. The comment stated
that this approach would provide parity
between disregarded and intercompany
transactions, parity between calculation
of a DCL register and the amount of a
DCL, and parity between different types
of items.
The final regulations do not adopt these
comments because the Treasury Department and the IRS remain of the view that
integration or other coordination would
result in considerable complexity and
administrative burden. Additionally, the
with-and-without approach proposed by
a comment would not address the double
deduction outcome arising from a disregarded entity classification in a prototypical case involving a DPL arising from
back-to-back financing where the disregarded entity does not also incur a DCL –
that is, the excess loss carried forward for
purposes of the with-and-without calculation would be relevant only to the extent
that the disregarded entity’s regarded
items of deduction or loss in a year exceed
the regarded items of income or gain in
that year.

882

Another comment suggested that the
DPL rules be replaced with an approach
that would treat a disregarded entity as a
regarded pass-through entity (for example, a one-partner partnership) solely for
purposes of the DCL rules, citing section
1503(d) as authority for such an approach.
The comment noted that the application of
the DPL rules to a disregarded entity can
be avoided by introducing another owner
(thereby converting the entity to a partnership) and that the suggested approach
avoids the administrative complexity of
this type of restructuring. The final regulations do not adopt this approach because it
would require broader changes to checkthe-box regulations (for example, by creating a new type of regarded pass-through
entity), and it could increase complexity
and compliance or administrative burden
as a result of regarding items that are outside the scope of the DPL rules, such as
payments for services and property transactions giving rise to ordinary income or
loss.
Lastly, a comment suggested that
because the DPL rules were issued as part
of a notice of proposed rulemaking that
also addresses the DCL rules and those
would operate independently of each
other, the DPL rules should be withdrawn
and issued as a standalone notice of proposed rulemaking. According to the comment, this approach would afford taxpayers a more adequate notice-and-comment
period and more clearly signal to affected
taxpayers the standalone nature of the
DPL rules. The Treasury Department and
the IRS have determined that finalizing
the DPL rules is appropriate regardless
of whether the proposed version of the
rules was included in a notice of proposed
rulemaking that included other concepts
and that the proposed version of the rules
provided sufficient notice-and-comment,
including about the standalone nature of
the DPL rules.
D. Scope of DPL rules
1. In general
Under the 2024 proposed regulations,
the DPL or DPI of a DPE would be determined by taking into account only items
that both (i) give rise to deductions or
income of the DPE under a foreign tax

Bulletin No. 2025–9

law (in the case of deductions, determined
with regard to any application of foreign
hybrid mismatch rules), and (ii) are disregarded for U.S. tax purposes but would be
interest, structured payments, or royalties
if the items were regarded.4 See proposed
§ 1.1503(d)-1(d)(6)(ii) and (d)(7)(v).
This limited application of the DPL rules
would address transactions that are likely
structured to avoid the DCL rules.
Comments suggested narrowing the
scope of the DPL rules in several respects
(and not expanding the rules to cover
other payments such as for disregarded
services), so that the rules better address
transactions likely to give rise to double
non-taxation and minimize compliance
burden. Some comments suggested that
the DPL rules not apply to royalties, or at
least royalties paid pursuant to a license
executed before the date of the 2024 proposed regulations. A comment asserted
that most foreign entities enter into intercompany licensing arrangements for nontax business reasons and that restructuring
these licenses is not always easy or feasible, including because of legal restrictions or foreign tax costs. Other comments
asserted that the licenses generally create
substantial dual inclusion income (either
through exploiting the intangible property or sub-licenses) and, therefore, do
not give rise to double non-taxation; one
of these comments, however, noted that
absent at least partial integration of the
DCL and DPL regimes, the dual inclusion
income attributable to a license agreement
could be double counted by both reducing
a DPL and a DCL.
Comments also suggested not applying the DPL rules to payments that are
subject to tax in another foreign country
(for example, payments between DPEs
that are tax residents of different foreign
countries), or possibly only to the extent
that the other foreign country has a sufficiently high statutory or effective tax rate.
A comment noted that an effective tax rate
analysis for purposes of such an exception
could rely on existing methods, like the
GloBE Model Rules or the GILTI hightax exception in § 1.951A-2(c)(7) but
acknowledged resulting compliance and
administrative burdens. Comments also

4

suggested not applying the DPL rules if the
disregarded entity has net income for foreign tax purposes (for example where the
DPE’s net regarded income or net disregarded services income exceeds its DPL),
asserting that, absent such an exception,
the entity classification regime would be
more complex to administer and taxpayers
would be incentivized to restructure in a
manner that is adverse to U.S. tax policy
and results in additional foreign tax and,
in turn, additional foreign tax credits. Further, comments recommended not applying the DPL rules to payments subject to
hybrid mismatch rules in the payor jurisdiction, contending that such jurisdiction
has taken the necessary steps to address
erosion of its tax base.
The final regulations generally do not
adopt these specific comments. The Treasury Department and the IRS have determined that excluding all royalties from the
DPL rules could incentivize new licensing
structures intended to give rise to avoidance of the DCL rules given the ease with
which licenses can be put in place.
The Treasury Department and the IRS
have also determined that a deduction in
both the United States and a foreign country is not adequately neutralized by an
income inclusion in another foreign country. Additionally, to the extent that taxpayers generally minimize payments from
entities in low-tax countries to related
entities in high-tax countries, an exception
for payments taxed at a sufficiently high
tax rate would likely have limited effect
while adding significant complexity.
Further, the Treasury Department and
the IRS have determined that an exception
under which the DPL rules do not apply if
the disregarded entity has net income for
foreign tax purposes would be contrary to
the approach of maintaining separate DCL
and DPL rules, and give rise to inappropriate results, as discussed in parts II.C and
III.B of the Summary of Comments and
Explanation of Revisions, respectively.
Also, taking into account the application
of foreign hybrid mismatch rules in determining a DPL or DPI will in many cases
limit the application of the DPL rules to
DPEs subject to foreign hybrid mismatch
rules. Moreover, if there is no foreign use

of a DPL and annual certification requirements are satisfied, the DPL rules have no
further effect. The Treasury Department
and the IRS remain of the view that the
filing of certification requirements is necessary, even in situations where there may
not be a net loss for foreign tax purposes
in that particular year, to ensure that any
deduction or loss composing a DPL is not
put to a foreign use during the certification
period. Moreover, this approach is consistent with the requirement in the DCL rules
that a domestic use agreement be filed (to
put a DCL to a domestic use) even in cases
where it may be unlikely that a DCL can
be put to a foreign use in a particular year,
such as due to disregarded income that is
not taken into account for DCL purposes.
Finally, structures involving hybridity
that produce double deduction outcomes
are contrary to the U.S. tax policies underlying section 1503(d). Consistent with the
current DCL rules, the DPL rules apply
even in circumstances where the absence
of DPL rules could reduce the amount
of foreign income tax that would otherwise be creditable for U.S. tax purposes
or where the adoption of such rules may
cause some taxpayers to restructure in a
manner that increases the amount of creditable foreign income tax.
However, in response to these comments, the final regulations provide a de
minimis exception and (consistent with
a comment) do not apply the DPL rules
to royalties paid pursuant to a license
agreement executed before the date of
the 2024 proposed regulations. See §
1.1503(d)-1(d)(5)(ii)(E) and (d)(6)(vii).
Together, these modifications are intended
to further limit application of the DPL
rules to cases that are likely structured to
produce double deduction outcomes. The
Treasury Department and the IRS have
determined that this approach strikes an
appropriate balance between that goal and
considerations like those discussed in the
preceding paragraphs, while also eliminating compliance burden in certain cases.
Under the de minimis exception, a
DPL with respect to a DPE and a foreign
taxable year is deemed to be zero if it is
incurred in connection with the conduct
of an active trade or business (based on

References to interest throughout this preamble include a reference to a structured payment, as the context requires.

Bulletin No. 2025–9

883

February 24, 2025

rules set forth under § 1.367(a)-2(d)),
and the amount of the DPL is less than
the lesser of $3 million or 10 percent of
the aggregate amount of all items of the
DPE that are deductible under a foreign
tax law. See § 1.1503(d)-1(d)(6)(vii). This
de minimis threshold is determined based
on the foreign tax law and, therefore, takes
into account items regardless of whether
regarded or disregarded for U.S. tax purposes.
2. Types of DPEs and Minority Interests
In addition to certain disregarded entities, the 2024 proposed regulations would
treat certain foreign branches and dual
resident corporations as DPEs. See proposed § 1.1503(d)-1(d)(1). This is because
a payment treated as made by a foreign
branch of a domestic corporation, including a dual resident corporation, under foreign tax law to a disregarded entity of the
corporation could give rise to a deduction
for foreign tax purposes without an inclusion for U.S. tax purposes, and any resulting double deduction generally would
not occur if the payee were regarded for
U.S. tax purposes. Further, where a DPE
is owned through a partnership, the DPL
rules would apply as to a DPE owner on a
proportionate basis, based on the percentage of interests (by value) of the DPE that
the DPE owner indirectly owns. See proposed § 1.1503(d)-1(d)(7)(ii).
Comments expressed concerns about
applying the DPL rules to minority interests in DPEs, contending that such interests do not present the same related-party
tax structuring concerns that the DPL
rules are intended to address, and noting
that a foreign use triggering event under
the DPL rules requires a use by a person
related to the DPE owner. The comments
further noted that the DPE combination
rule would exacerbate these concerns
because, for example, a DPE owner’s
inability to comply with certification
requirements with respect to a minority
interest in a DPE could cause a triggering
event with respect to a DPL attributable to
that DPE and other DPEs in the same foreign country. Accordingly, the comments
recommended applying the DPL rules
with respect to a DPE owner and DPE
only if the entities are related (determined
under section 954(d)(3), for instance). A

February 24, 2025

comment also asserted that applying the
DPL rules on a proportionate basis by reference to the value of a partnership interest is burdensome because it requires an
annual valuation of the partnership, and
the comment suggested retaining this
approach only to the extent that other partnership rules require similar valuations.
The Treasury Department and the IRS
agree that the DPL rules should not apply
to minority interests. Accordingly, the
final regulations revise the DPE definition
to exclude entities that are not related,
within the meaning of section 954(d)(3),
to a DPE owner. See § 1.1503(d)-1(d)(5)
(i). In addition, where a DPE owner indirectly owns less than all the interests (but
more than a minority interest) in a DPE,
the final regulations remove the requirement in the 2024 proposed regulations
that would apply the DPL rules on a proportionate basis based on value, because
the Treasury Department and the IRS have
determined that a DPE owner’s proportionate interest can be determined under
other reasonable methods.
Further, the final regulations clarify
that a foreign branch owned by a domestic
corporation through one or more partnerships may be a DPE. See § 1.1503(d)-1(d)
(5)(i)(B). Thus, if a partnership makes
a payment to a disregarded entity of the
partnership and the payment is attributed
to a foreign branch under foreign tax law,
then (because the foreign branch may be
a DPE) a domestic corporate partner’s
proportionate share of a resulting deduction under the foreign tax law can give
rise to a DPL. See § 1.1503(d)-1(d)(6)
(ii). Similarly, to address deductions arising under foreign tax law by reason of the
partnership being a tax resident of a foreign country (rather than by reason of the
partnership having a foreign branch), the
final regulations provide that an entity that
is treated as a partnership for U.S. tax purposes, but is a foreign tax resident, may be
a DPE. See § 1.1503(d)-1(d)(5)(i)(C).
3. “True” foreign branches
Because the DPL rules are a component of the check-the-box rules, the rules
do not apply with respect to deductions
resulting under a foreign tax law from
payments treated as made between a
“true” foreign branch (that is, a foreign

884

taxable presence not conducted through
a disregarded entity) and its owner.
One comment expressed concerns with
disparate treatment resulting from this
limitation, asserting that it would incentivize structures involving true foreign
branches.
The Treasury Department and the IRS
have determined that this concern does not
detract from the utility of the DPL rules.
To the extent disregarded entity classifications facilitate structures intended to
give rise to avoidance of the DCL rules,
addressing those structures through new
rules is appropriate regardless of whether
the new rules would also address structures that are less common or more burdensome to implement.
E. Foreign use issues
1. “All or Nothing” Principle
Under the 2024 proposed regulations,
a foreign use of a DPL would be determined under the principles of the rules
determining the foreign use of a DCL,
which are in § 1.1503(d)-3. See proposed
§ 1.1503(d)-1(d)(3)(i). Thus, for example,
under the so-called “made available” standard, a foreign use of a DPL would occur
if any portion of a deduction taken into
account in computing the DPL is made
available under a relevant foreign tax law
to offset an item of income that, for U.S.
tax purposes, is an item of income of a foreign corporation that is related to the DPE
owner. Generally, a foreign use of a DPL
(or DCL) would occur as a result of structures intended to avoid the application of
the DCL rules.
The concept of the entirety of a DPL (or
DCL) being put to a foreign use by reason
of the availability under a relevant foreign
tax law of any portion of a deduction composing the DPL (or DCL) is, in conjunction with the “made available” standard,
referred to as the “all or nothing” principle. See TD 9315 (72 FR 12902, 1291011). As indicated in the preamble to the
2024 proposed regulations, the all or nothing principle addresses a concern of the
Treasury Department and the IRS that
alternative approaches, such as treating a
foreign use as occurring only to the extent
that a deduction actually offsets income of
a foreign corporation, would lead to sig-

Bulletin No. 2025–9

nificant administrative complexity and the
need for detailed ordering rules.
A comment recommended against the
all or nothing principle, asserting that
the administrability concerns underlying
the principle in the DCL context are not
applicable in the DPL context because a
DPL is defined only by reference to certain deductions existing for foreign tax
purposes and, thus, the DPL rules do not
require an analysis of whether an item that
exists for U.S. tax purposes composes an
item that exists for, and has been made
available for use under, a foreign tax law.
Additionally, the comment stated that the
all or nothing principle is inconsistent
with OECD reports and can give rise to
inappropriate outcomes.
The Treasury Department and the IRS
remain of the view that departing from the
all or nothing principle in the DPL context would (like in the DCL context) give
rise to significant administrability and
compliance concerns. See also TD 9315,
72 FR 12902, 12911 (“The IRS and Treasury Department continue to believe that,
even under the approaches suggested by
these commentators, departing from the
all or nothing principle would lead to substantial administrative complexity.”) For
example, specific rules would be needed to
address a situation where portions of each
of a DPL and a non-DPL loss are shared
through foreign tax consolidation or a similar regime, as well as a situation where
a foreign corporation has a net operating
loss that forms part of a net operating loss
carryforward that includes the DPL. Additionally, the Treasury Department and the
IRS have determined that consistency is
needed between the DCL rules and DPL
rules because the DPL rules are intended
to prevent the avoidance of the DCL rules.
Accordingly, the final regulations do not
adopt the comment.
2. Carrybacks and Carryforwards of
Losses Under Foreign Tax Law
A comment stated that a foreign use of
a DPL can occur only if, under a foreign
tax law, deductions composing a DPL are
included in a net operating loss that is carried forward or carried back to another
taxable year, and the comment suggested
that the DPL certification rules should
be limited to monitoring whether such a

Bulletin No. 2025–9

carryover occurs. According to the comment, the scenarios presenting the risk of
a foreign use of a DPL are more limited
than the scenarios presenting the risk of
a foreign use of a DCL because, unlike
DCLs, DPLs do not give rise to timing
differences between U.S. and foreign tax
systems.
The Treasury Department and the IRS
agree that a foreign use of a DPL may
occur through carryforwards or carrybacks of losses but have determined that a
foreign use would more commonly occur
in the year in which the DPL is incurred.
A foreign use could also result from a
merger or similar transaction (such as the
transfer of the interests in the DPE that
incurs the DPL to a related CFC). Accordingly, the final regulations do not adopt
this comment.
3. Mirror Legislation Rule
The final regulations narrow the definition of a foreign use for DPL purposes by
excluding the deemed foreign use that may
occur under the mirror legislation rule.
See § 1.1503(d)-3(e)(4). This exception,
which is consistent with the exception in
§ 1.1503(d)-3(e)(3) for domestic consenting corporations, clarifies that any denial
of a deduction for a disregarded payment
under foreign hybrid mismatch rules is not
treated as giving rise to a DPL or a foreign
use of a DPL. See also § 1.1503(d)-1(d)
(6)(v) (coordination with foreign hybrid
mismatch rules).
F. DPL cumulative register and deduction
for a DPL inclusion
The 2024 proposed regulations would
provide that a DPL cumulative register
with respect to a DPE is, for each foreign
taxable year of the DPE, increased by the
DPE’s DPI or decreased by its DPL. See
proposed § 1.1503(d)-1(d)(5)(ii). When
a DPL of the DPE is triggered, any positive balance in the cumulative register
would be applied to the DPL and, accordingly, would reduce the amount that the
DPE owner must include in income with
respect to the DPE under the DPL rules.
See proposed § 1.1503(d)-1(d)(2) and (5).
Comments recommended that the
DPL cumulative register be adjusted to
include a DPL inclusion amount that has

885

been included in the DPE owner’s gross
income. The comments noted that, without
such an adjustment, a single DPL could
be included in the DPE owner’s income
more than once. Comments also recommended treating a DPL inclusion as giving rise to a deduction (or similar offset)
of the DPE owner in subsequent taxable
years to prevent the DPL rules from permanently increasing U.S. taxable income.
These comments suggested allowing such
a deduction (or similar offset) once the
DPE has sufficient DPI or “dual inclusion
income” (determined as the lesser of certain foreign taxable income and certain
U.S. taxable income) in subsequent years.
Further, a comment recommended treating the deduction as having the same U.S.
tax characteristics (for example, character
and source) as the DPL inclusion.
The Treasury Department and the IRS
agree with these comments. The final regulations thus modify the determination of
a DPL cumulative register so that a DPL
does not decrease the register, thereby
preventing a negative balance in the register. See § 1.1503(d)-1(d)(2)(iii); see also
§ 1.1503(d)-7(c)(42) (example illustrating this rule). This approach generally
achieves the same outcomes as those recommended by comments, while also facilitating the application of any positive register balance to a triggered DPL in cases
where there are multiple DPLs but not all
the DPLs are triggered.
Additionally, to reflect a DPL inclusion (and consistent with comments), the
final regulations provide the DPE owner
a deduction (not to exceed the DPL inclusion) to the extent that the DPE derives
DPI in a year following the year of the
DPL inclusion. See § 1.1503(d)-1(d)(1)
and (d)(2)(ii). Regardless of the extent
to which the DPI is derived from interest
or royalties, the deduction has the same
character and source as the DPL inclusion
to which it relates. See § 1.1503(d)-1(d)
(2)(iv)(B). In this way, the DPE owner’s
items of income and deduction under the
DPL rules are similar to the items that the
DPE owner would have had if the payments composing the DPL were regarded
for U.S. tax purposes. To illustrate, consider a case where a disregarded entity
makes a payment to its domestic corporate
owner and the payment gives rise to an
interest deduction under foreign tax law

February 24, 2025

that is put to a foreign use in the current
year. If the payment were instead regarded
for U.S. tax purposes (for example, if the
payment were instead a § 1.1502-13 intercompany transaction), the payment would
give rise to an income inclusion in the current year and a deduction, the use of which
generally would be suspended under the
DCL rules until there is sufficient income
in subsequent years. The DPL rules produce a similar outcome.
Finally, to prevent a single DPL from
giving rise to more than one DPL inclusion, the final regulations terminate the
certification period with respect to a
DPL as a result of a DPL inclusion. See §
1.1503(d)-1(d)(6)(iii).
G. Computation of a DPL or DPI for
partial-year DPE status
Comments requested clarification on
how to compute a DPL or DPI for the first
foreign taxable year in which an entity or
branch is treated as a DPE of a DPE owner.
In such a case, some comments suggested
a rule pursuant to which the DPL or DPI
would be computed without regard to
items incurred (or allocable to, including
under the principles of § 1.1502-76(b))
during the portion of the foreign taxable
year that precedes the first day that the
DPL rules apply with respect to the DPE
owner and DPE.
The Treasury Department and the IRS
agree with these comments, and the final
regulations therefore clarify that items
incurred or derived in the portion of a foreign taxable year that an entity or foreign
branch is not a DPE are not taken into
account for purposes of calculating DPI or
DPL. See § 1.1503(d)-1(d)(5)(ii). On the
other hand, if an entity or foreign branch
is a DPE at all times during the foreign
taxable year, this pro-ration rule does not
apply even though the DPE owner’s U.S.
taxable year may differ from the DPE’s
foreign taxable year.
H. Additional reporting and
documentation
One comment supported the DPL rules,
noting that closing this existing loophole
and providing clarity is important to ensure
tax fairness, prevent abuse, and provide
consistency. The comment also suggested
that the rules provide detailed guidance on
the documentation and reporting require-

February 24, 2025

ments for disregarded payments, such as
specifying that taxpayers must maintain
detailed records and submit these records
as part of their tax filings.
The Treasury Department and the IRS
have determined that the documentation
and reporting requirements in the proposed regulations, as modified in these
final regulations (such as to require additional reporting in § 1.1503(d)-1(d)(4)
(iv) related to the suspended deduction),
are sufficient for the IRS to administer
the rules effectively. Further, the IRS may
request additional information regarding
DPLs on audit, as necessary. Accordingly,
this comment is not adopted.
III. Rules that Apply to both DCLs and
DPLs
A. Anti-avoidance rule
The 2024 proposed regulations would
include an anti-avoidance rule that applies
with respect to both DCLs and DPLs. This
rule generally would provide that appropriate adjustments may be made with
respect to a transaction, series of transactions, plan, or arrangement that is engaged
with a view to avoid the purposes of section 1503(d) and the regulations thereunder. See proposed § 1.1503(d)-1(f). The
preamble to the 2024 proposed regulations noted that the anti-avoidance rule
could address new avoidance structures
or interpretations, rather than continuing
to address these transactions on a caseby-case basis through the adoption of new
rules. See part I.C. of the Explanation of
Provisions of the 2024 proposed regulations.
Some comments asserted that the
application of the anti-avoidance rule is
unclear and should therefore be withdrawn. Other comments requested that,
rather than applying the anti-avoidance
rule based on whether there is “a view”
to avoid the purposes of section 1503(d)
and the regulations thereunder, it should
apply based on the more common principal purpose-based standard, or if the
taxpayer is attempting to “evade” the purposes of section 1503(d). Comments also
requested additional examples illustrating
the application or nonapplication of the
anti-avoidance rule, including examples
that would clarify that the anti-avoidance
rule does not apply if taxpayers restructure

886

their operations to avoid the application
of the DPL rules. Finally, one comment
requested that, consistent with the general
approach in the DCL rules to calculate the
amount of a DCL based on U.S. tax items,
the anti-avoidance rule should be revised
to ignore the treatment of items under foreign law.
In response to the comments, the
anti-avoidance rule is modified to make
clear that the purpose of section 1503(d)
and the regulations thereunder is to prevent double deduction and similar outcomes. Thus, if taxpayers restructure their
arrangements to avoid the application
of the DPL rules or the DCL rules, such
as by converting disregarded payments
into regarded payments or terminating
agreements that give rise to disregarded
payments, the anti-avoidance rule does
not apply if the restructured arrangement does not give rise to the potential
for two deductions – one for foreign tax
purposes, and one for US. tax purposes.
See § 1.1503(d)-1(f). The final regulations
also provide additional examples that
illustrate the application, and nonapplication, of the anti-avoidance rule. See §
1.1503(d)-7(c)(44) and (45). The Treasury
Department and the IRS continue to study
how the intercompany transaction rules
of § 1.1502-13 would apply to the facts
such as those presented in the example in
§ 1.1503(d)-7(c)(44).
The final regulations add certain
exceptions to the application of the
anti-avoidance rule, as it applies to
DCLs, for transactions or interpretations that would be addressed by rules
in the 2024 proposed regulations. See
§ 1.1503(d)-1(f)(2). For example, the
anti-avoidance rule does not apply to
structures that may reduce or eliminate a
DCL by reason of items of income arising
from the ownership of stock and taken
into account under § 1.1503(d)-5(b)(1) or
(c)(4)(iv) (the “stock ownership rule”).
This exception is intended to make clear
that the anti-avoidance rule does not
apply in such a case even though the
2024 proposed regulations would eliminate the stock ownership rule (other than
with respect to certain portfolio interests)
and the preamble to the 2024 regulations
states that taxpayers may be affirmatively
structuring into the rules to produce inappropriate double-deduction outcomes.

Bulletin No. 2025–9

The Treasury Department and the IRS
have determined that the anti-avoidance
rule should not apply in such cases at
this time, despite the policy concerns
underlying the transactions, because the
substantive rules that would address the
transactions have not yet been finalized.
These exceptions to the anti-avoidance
rule would be removed or modified if,
after taking into account comments, the
corresponding rules in the 2024 proposed
regulations are finalized in a subsequent
guidance project. The non-application
of the anti-avoidance rule in these cases
does not affect the potential application
of other rules or judicial doctrines, such
as the substance-over-form or step-transaction doctrines. The Treasury Department and the IRS request comments on
the modification or removal of these
exceptions upon finalization of the corresponding proposed rules.
In light of the additional certainty and
clarity provided by the modification to the
rule and the additional examples, these
final regulations do not adopt the recommendations to withdraw the anti-avoidance rule or employ a new standard based
on a principal purpose or evasion. Finally,
because the anti-avoidance rule applies
with respect to the DPL rules, which are
premised on the treatment of items under
foreign law, these final regulations do
not adopt the recommendation to ignore
foreign law treatment in applying the
anti-avoidance rule.
B. Deemed ordering rule
In determining the foreign use of a
DPL, the 2024 proposed regulations
would provide that the principles of the
exceptions in § 1.1503(d)-3(c) apply,
which include the deemed ordering rule
under § 1.1503(d)-3(c)(3). See proposed
§ 1.1503(d)-1(d)(3)(i). This rule generally
would provide that if losses or deductions
are available under foreign law both to offset income that would constitute a foreign
use and income that would not constitute
a foreign use, and the foreign law does not
provide applicable rules for determining
which income is offset by the losses or
deductions, then the losses or deductions
are first deemed to be available to offset
the income that would not constitute a
foreign use, to the extent thereof, before

Bulletin No. 2025–9

being considered to be made available to
offset the income that would constitute a
foreign use. See § 1.1503(d)-3(c)(3).
In cases where a DPE has both a DPL
and income that is not DPI, such as items
of income other than interest and royalties that are disregarded for U.S. tax purposes or income that is regarded for U.S.
tax purposes, comments asserted that the
application of the deemed ordering rule is
unclear, and that income that is not DPI
should be taken into account in determining whether the exception prevents a
foreign use of the DPL (or, alternatively,
prevents the creation of a DPL). Under
this approach, a DPL would be treated as
first offsetting the DPE’s income under
the foreign tax law, regardless of whether
that income is regarded or disregarded.
Accordingly, no foreign use of a DPL
would generally occur if the DPE has net
positive income under the foreign tax law.
The Treasury Department and the
IRS disagree with these comments. The
deemed ordering rule is related to, and
therefore must apply in a manner consistent with, the rules that calculate a DCL
or DPL and related cumulative register.
Thus, because the calculation of a DCL
and DCL cumulative register only takes
into account regarded items, the deemed
ordering rule as applied to DCLs also
must only take into account such items.
Similarly, because the calculation of a
DPL and DPL cumulative register only
takes into account disregarded interest and
royalties, so too should the deemed ordering rule only take such items into account.
This consistent approach promotes coordinated outcomes, ensures that all relevant
items are appropriately taken into account,
and avoids double-counting concerns. A
partial integration of the DCL and DPL
rules only in the deemed ordering rule
would not be appropriate without providing comprehensive rules to address, for
example, the opposite fact pattern where
regarded items of deduction or loss could
be viewed as offsetting disregarded interest and royalty income and thereby creating or increasing the amount of a DPL that
is put to a foreign use.
One comment requested clarification
regarding the condition that the deemed
ordering rule applies only if the laws of
the foreign country do not provide applicable rules for determining which income

887

is offset by the losses or deductions. The
comment noted, as an example, that such
uncertainty can arise in connection with
the steps required in applying the GloBE
Model Rules. It has also been observed
that the method by which the foreign country takes into account items that would, or
would not, give rise to a foreign use likely
would not change the arithmetic result of
determining taxable income under foreign
law or otherwise have economic significance. Further, there is no similar condition in the rules that determine a DCL or
DPL, or the related cumulative registers,
and as noted above these regimes should
operate in a consistent manner. As a result,
the final regulations eliminate this condition from the deemed ordering rule for
purposes of both the DPL and DCL rules.
See § 1.1503(d)-3(c)(3).
IV. Applicability Dates
A. DPL rules
The 2024 proposed regulations would
apply the DPL rules as of the date those
regulations were filed with the Federal Register (August 6, 2024), subject
to a one-year delay for certain entities
in existence on that date. See proposed
§
301.7701-3(c)(4)(vi).
Comments
requested a deferred application of the
DPL rules, with some suggesting specific
dates (such as taxable years beginning
after publication of final regulations) and
others generally suggesting additional
time for taxpayers to implement new processes and systems or undertake restructurings to avoid the application of the DPL
rules. Comments also requested clarification on when the DPL rules would apply
in cases like one where a domestic corporation owns multiple disregarded entities
that are tax residents of foreign countries,
with some (but not all) formed or acquired
after August 6, 2024, but before August 6,
2025.
The Treasury Department and the IRS
agree with the suggestions to defer application of the DPL rules. Accordingly,
the final regulations apply the DPL rules
to taxable years of DPE owners beginning on or after January 1, 2026. See §§
1.1503(d)-8(b)(11) and 301.7701-2(e)
(10). This use of a single applicability
date obviates the need for additional rules

February 24, 2025

clarifying application of the DPL rules in
cases like ones where a domestic corporation owns multiple disregarded entities.
B. Other rules
The final regulations apply the
anti-avoidance rule to DCLs incurred in
taxable years ending on or after August
6, 2024, consistent with the approach
in the 2024 proposed regulations. See §
1.1503(d)-8(b)(15). Further, consistent
with the applicability date of the DPL
rules, the anti-avoidance rule applies to
DPLs for taxable years beginning on or
after January 1, 2026. See id. Additionally,
the final regulations apply revisions to the
deemed ordering rule in § 1.1503(d)-3(c)
(3) to DCLs incurred in taxable years
beginning on or after January 1, 2026,
and to DPLs in taxable years beginning
on or after January 1, 2026 (each consistent with the applicability date of the DPL
rules). See § 1.1503(d)-8(b)(17). Finally,
the final regulations apply the rule regarding the non-application of the sixty-month
limitation for an entity that, absent an
election to change its classification, would
become a DPE as of August 6, 2024. See §
301.7701-2(e)(10).
Additional Transition Relief with
respect to the GloBE Model Rules
As noted in the Background of this
preamble, the 2024 proposed regulations
would address the application of the DCL
rules to the GloBE Model Rules. For
example, the 2024 proposed regulations
would provide that an IIR or QDMTT may
be an income tax for purposes of the DCL
rules.5 The 2024 proposed regulations
also would address the effect of an IIR or
a QDMTT on certain entities and foreign
business operations, the application of the
DCL rules to the Transitional CbCR Safe
Harbour, and the interaction of the duplicate loss arrangement rules with the mirror legislation rule under § 1.1503(d)-3(e).
In addition, the 2024 proposed regulations
would extend and broaden, the transition
relief announced in Notice 2023-80 such
that the DCL rules (including the DPL

rules) would generally apply without
taking into account QDMTTs or Top-up
Taxes collected under an IIR or UTPR
with respect to losses incurred in taxable
years beginning before August 6, 2024.
See proposed § 1.1503(d)-8(b)(12). This
extension, and broadening, would provide
taxpayers more certainty, allow for further
consideration of the proposed regulations
and related comments, and allow for consideration of further developments at the
OECD.
Several comments requested additional
transition relief for the application of the
DCL rules and DPL rules to the GloBE
Model Rules. For example, comments
suggested that the applicability date be
delayed until taxable years beginning on
or after January 1, 2025, or through 2026;
another comment suggested that the rules
not apply until there are final DCL rules
and final GloBE Model Rules. Some comments requested additional transition relief
because the GloBE Model Rules are still
evolving, and relief would allow for additional time to take into account additional
OECD guidance and legislation enacted
by jurisdictions to incorporate the GloBE
Model Rules. One comment stated that if
the DCL rules and DPL rules apply with
respect to UTPRs that transition relief be
provided for such application for at least
2025. Finally, one comment requested
clarification that the transition relief is
also available with respect to DPLs.
The Treasury Department and the IRS
agree that additional transitional relief
is warranted. As some comments noted,
such relief would allow additional time to
consider future OECD guidance and legislation enacted by foreign jurisdictions that
would implement the GloBE Model Rules.
Accordingly, when the 2024 proposed regulations addressing the application of the
DCL rules to the GloBE Model Rules are
finalized, the applicability date set forth
in the 2024 proposed regulations will be
modified. The final regulations will provide that the DCL rules will apply without
taking into account QDMTTs or Top-up
Taxes collected under an IIR or UTPR
incurred in taxable years beginning before
August 31, 2025. The additional transition

relief does not affect the application of the
DPL rules because the DPL rules do not
apply until taxable years beginning on or
after January 1, 2026. Taxpayers may rely
on the guidance described in this paragraph until final regulations are published
in the Federal Register. The transition
relief is limited to an additional year to
minimize the double deduction outcomes
that may result.
Special Analyses
I. Regulatory Planning and Review
Pursuant to the Memorandum of
Agreement, Review of Treasury Regulations under Executive Order 12866 (June
9, 2023), tax regulatory actions issued by
the IRS are not subject to the requirements
of section 6 of Executive Order 12866, as
amended. Therefore, a regulatory impact
assessment is not required.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(44 U.S.C. 3501-3520) (“PRA”) requires
that a Federal agency obtain the approval
of the OMB before collecting information
from the public, whether such collection
of information is mandatory, voluntary, or
required to obtain or retain a benefit. Section 1.1503(d)-1(d)(4) of these regulations
requires the collection of information.
As discussed in part II.B.3 of the Explanation of Provisions of the 2024 proposed
regulations, to avoid or reduce a DPL
inclusion amount certain taxpayers are
required to make certifications, for example, that no foreign use has occurred with
respect to a disregarded payment loss. The
IRS will use this information to determine
the extent to which these taxpayers need
to recognize income under these final regulations.
The reporting burden associated with
this collection of information will be
reflected in the PRA submissions associated with Form 1120 (OMB control number 1545-0123). The Treasury Department
and the IRS do not have readily available
data to determine the number of taxpayers

The Qualified Domestic Minimum Top-up Tax (“QDMTT”), IIR (also referred to as the income inclusion rule), and UTPR (also referred to as the under-taxed profits rule) are defined in
Article 10 of the GloBE Model Rules.
5

February 24, 2025

888

Bulletin No. 2025–9

affected by this collection of information
because no reporting module currently
identifies these types of disregarded payments.
III. Regulatory Flexibility Act
When an agency issues a rulemaking
proposal, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) (“RFA”) requires the
agency to prepare and make available for
public comment an initial regulatory flexibility analysis that will describe the impact
of the proposed rule on small entities. See
5 U.S.C. 603(a). Section 605 of the RFA
provides an exception to this requirement
if the agency certifies that the proposed
rulemaking will not have a significant
economic impact on a substantial number
of small entities. A small entity is defined
as a small business, small nonprofit organization, or small governmental jurisdiction. See 5 U.S.C. 601(3) through (6).
The Treasury Department and the IRS
do not expect that these final regulations
will have a significant economic impact
on a substantial number of small entities.
However, because there is a possibility
of significant economic impact on a substantial number of small entities, an initial
regulatory flexibility analysis was provided in the 2024 proposed regulations.
No comments were received in response
to the request for comments concerning
the number of small entities that may be
impacted and whether that impact will be
economically significant.
A. Reasons why action is being
considered
As explained in part II.A of the Explanation of Provisions of the 2024 proposed
regulations, the disregarded payment loss
rules in these final regulations address certain hybrid payments that can give rise to
double deduction outcomes.
B. Objectives of, and legal basis for, the
2024 proposed regulations
The disregarded payment loss rules in
these final regulations require an income
inclusion for U.S. tax purposes to prevent
the avoidance of the DCL rules that would
otherwise arise from certain disregarded
payments. Sections 1503(d)(2)(B) and (d)

Bulletin No. 2025–9

(3), 7701, and 7805 of the Code are the
legal basis for these regulations.

reduce any economic impact that the regulations could have on small entities.

C. Small entities to which these
regulations will apply

IV. Unfunded Mandates Reform Act

Because an estimate of the number of
small businesses affected is not currently
feasible, this regulatory flexibility analysis assumes that a substantial number of
small businesses will be affected. The
Treasury Department and the IRS do not
expect that these final regulations will
affect a substantial number of small nonprofit organizations or small governmental jurisdictions.
D. Projected reporting, recordkeeping,
and other compliance requirements
The final regulations impose a certification requirement that is filed with a
domestic corporation’s tax return, and to
comply with that requirement the domestic corporation may need to keep records
such as its DPL cumulative register as
defined in § 1.1503(d)-1(d)(2)(iii). See §
1.1503(d)-1(d)(4)(iii).
E. Duplicate, overlapping, or relevant
Federal rules
The Treasury Department and the IRS
are not aware of any Federal rules that
duplicate, overlap, or conflict with these
final regulations.
F. Alternatives considered
These final regulations address policy concerns that are similar to the concerns underlying the enactment of section
1503(d), which applies uniformly to large
and small business entities. The Treasury
Department and the IRS have determined
that these final regulations should generally apply without regard to the size of the
corporation – a small business exception
would undermine the anti-hybridity policies underlying these regulations. Accordingly, there is no viable alternative to
these final regulations for small entities.
The Treasury Department and the IRS
expect that the revisions in these final regulations to apply a de minimis threshold,
and exclude royalties from pre-August 6,
2024, licenses and minority interests, will

889

Section 202 of the Unfunded Mandates
Reform Act of 1995 (“UMRA”) requires
that agencies assess anticipated costs and
benefits and take certain other actions
before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a State, local, or
Tribal government, in the aggregate, or by
the private sector, of $100 million in 1995
dollars, updated annually for inflation.
The final rules do not include any Federal
mandate that may result in expenditures
by State, local, or Tribal governments,
or by the private sector in excess of that
threshold.
V. Executive Order 13132: Federalism
Executive Order 13132 (Federalism)
prohibits an agency from publishing any
rule that has federalism implications if
the rule either imposes substantial, direct
compliance costs on State and local governments, and is not required by statute,
or preempts State law, unless the agency
meets the consultation and funding
requirements of section 6 of Executive
Order 13132. The final rules do not have
federalism implications and do not impose
substantial direct compliance costs on
State and local governments or preempt
State law within the meaning of Executive
Order 13132.
Effect on Other Documents
Section 3 of Notice 2023-80 (202352 IRB 1583) is obsolete as of August 6,
2024.
Statement of Availability of IRS
Documents
IRS Revenue Procedures, Revenue
Rulings, Notices, and other guidance
cited in this document are published in the
Internal Revenue Bulletin or Cumulative
Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC
20402, or by visiting the IRS website at
https://www.irs.gov.

February 24, 2025

Drafting Information
The principal author of these regulations is Andrew L. Wigmore of the Office
of the Associate Chief Counsel (International). However, other personnel from
the Treasury Department and the IRS participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes,
Excise taxes, Gift taxes, Income taxes,
Penalties, Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, the Treasury Department
and the IRS amend 26 CFR parts 1 and
301 as follows:
PART 1―INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by removing the
entry for § 1.1503(d) and adding entries
for §§ 1.1503(d)-1 through 1.1503(d)-8 in
numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
*****
Sections 1.1503(d)-1 through 8 also
issued under 26 U.S.C. 953(d), 1502,
1503(d) and (d)(2)(B), (d)(3), and (d)(4),
and 7701.
*****
Par. 2. Section 1.1503(d)-1 is amended
by:
1. Revising the section heading;
2. Revising and republishing paragraph
(a);
3. Redesignating paragraph (d) as paragraph (e);
4. Adding a new paragraph (d);
5. Revising the paragraph heading for
newly redesignated paragraph (e);
6. In newly redesignated paragraphs
(e)(1) through (3), removing the language
“section 1503(d) and these regulations” in

February 24, 2025

each place it appears and adding the language “this section and §§ 1.1503(d)-2
through 1.1503(d)-8” in its place; and
7. Adding paragraph (f).
The revisions and additions read as follows:
§ 1.1503(d)-1 Definitions, special rules,
and filings.
(a) In general. This section and
§§ 1.1503(d)-2 through 1.1503(d)-8 provide rules concerning the determination
and use of dual consolidated losses pursuant to section 1503(d). Paragraph (b)
of this section provides definitions that
apply for purposes of this section and
§§ 1.1503(d)-2 through 1.1503(d)-8. Paragraph (c) of this section provides rules for
a domestic consenting corporation. Paragraph (d) of this section provides rules for
disregarded payment losses. Paragraph (e)
of this section provides relief for certain
compliance failures due to reasonable
cause, and a signature requirement for filings. Paragraph (f) of this section provides
an anti-avoidance rule.
*****
(d) Disregarded payment loss (DPL)
rules―(1) In general. The disregarded
payment loss rules of this paragraph (d)
only apply to a domestic corporation
(including a dual resident corporation)
that directly or indirectly owns an interest in a disregarded entity, regardless of
whether the disregarded entity is domestic
or foreign (such a domestic corporation,
a disregarded payment entity owner, or
DPE owner). If these rules apply to a DPE
owner, then the DPE owner determines disregarded payment income or disregarded
payment loss of its disregarded payment
entities (if any) described in paragraph (d)
(5)(i)(A), (B), (C), or (D) of this section
in accordance with paragraph (d)(5)(ii)
of this section and, in the case of a disregarded payment loss for which a triggering event occurs under paragraph (d)(3) of
this section, includes an amount equal to
the DPL inclusion amount in gross income
and establishes a suspended deduction in
accordance with paragraph (d)(2) of this
section. The inclusion required under this
paragraph (d)(1) and paragraph (d)(2)
(i) of this section is included in the taxable year of the DPE owner in which the
triggering event occurs, and the corre-

890

sponding suspended deduction under this
paragraph (d)(1) and paragraph (d)(2)(ii)
of this section is established in the subsequent taxable year of the DPE owner. See
§ 1.1503(d)-7(c)(42) for an example illustrating the application of the disregarded
payment loss rules.
(2) DPL amounts―(i) DPL inclusion
amount. A DPL inclusion amount means,
with respect to a disregarded payment
loss as to which a triggering event occurs
during the DPL certification period, an
amount equal to the disregarded payment
loss. Such amount is reduced (but not
below zero) to the extent of the balance in
the DPL cumulative register of the disregarded payment entity if the certification
requirement under paragraph (d)(4)(iii) of
this section is satisfied.
(ii) Suspended deduction. With respect
to a DPL inclusion amount, a DPE owner
establishes a suspended deduction in
an amount equal to the DPL inclusion
amount. The suspended deduction is
allowed as a deduction under the principles of § 1.1503(d)-6(h)(6) by treating
the suspended deduction as if it were
a reconstituted net operating loss that
becomes deductible only to the extent of
disregarded payment income derived in
the taxable year in which the suspended
deduction is established or subsequent
taxable years (as measured by the disregarded payment entity’s DPL cumulative
register), provided that the certification
requirement under paragraph (d)(4)(iv) of
this section is satisfied.
(iii) DPL cumulative register. The term
DPL cumulative register means, with
respect to the disregarded payment entity,
an account the balance of which is computed at the end of each foreign taxable
year of the entity, and which is—
(A) Increased by the amount of disregarded payment income of the entity for
the foreign taxable year, and then, after
determining the DPL inclusion amount
for the year,
(B) Decreased by the amount of the
cumulative register balance that is used
under paragraph (d)(2)(i) or (ii) of this
section.
(iv) Character and source—(A) DPL
inclusion amount. A DPE owner’s income
inclusion for a DPL inclusion amount
is, for all U.S. tax purposes, treated as
ordinary income, and characterized and

Bulletin No. 2025–9

sourced, including for purposes of sections 904(d) and 907, in the same manner
as if the disregarded payment entity were
a foreign corporation and the amount were
interest or royalty income paid by the foreign corporation (taking into account, for
example, section 904(d)(3) if such foreign
corporation would be a controlled foreign
corporation). For these purposes, the DPL
inclusion amount is considered comprised
of interest or royalty income based on the
proportion of interest or royalty deductions taken into account, respectively, in
computing the disregarded payment loss
relative to all the deductions taken into
account in computing the disregarded
payment loss. Further, for these purposes,
a deduction attributable to a structured
payment or a deduction with respect to
equity is treated as an interest deduction.
(B) Suspended deduction. A DPE
owner’s deduction with respect to a suspended deduction is, for all U.S. tax purposes, characterized and sourced in the
same manner as the income for the DPL
inclusion amount to which it relates. If the
income from the DPL inclusion amount is
assigned to multiple statutory and residual
groupings, the deduction is allocated and
apportioned to each grouping in the same
proportions as the DPL inclusion amount.
(3) Triggering events. An event
described in paragraph (d)(3)(i) or (ii)
of this section is a triggering event with
respect to a disregarded payment loss of a
disregarded payment entity.
(i) Foreign use. A foreign use of the
disregarded payment loss. For this purpose, a foreign use is determined under
the principles of § 1.1503(d)-3 (including
the exceptions in § 1.1503(d)-3(c)), by
treating the disregarded payment loss as a
dual consolidated loss, treating the disregarded payment entity as a separate unit
(or, in the case of a disregarded payment
entity that is a dual resident corporation,
by treating the disregarded payment entity
as a dual resident corporation), and, in §
1.1503(d)-3(a)(1)(i) and (ii), only taking
into account a person that is related to the
DPE owner of the disregarded payment
entity. Thus, for example, a foreign use
of a disregarded payment loss occurs if,
under a relevant foreign tax law, any portion of the foreign law deduction taken
into account in computing the disregarded
payment loss is made available (includ-

Bulletin No. 2025–9

ing by reason of a foreign consolidation
regime or similar regime, or a sale, merger,
or similar transaction) to offset an item of
income that, for U.S. tax purposes, is an
item of a foreign corporation, but only if
such foreign corporation is related to the
DPE owner of the disregarded payment
entity. When applying the principles of the
deemed ordering rule in § 1.1503(d)-3(c)
(3), items of income or gain are taken into
account only to the extent such items are
described in paragraph (d)(5)(ii)(D) of
this section; thus, for example, such items
include items of income that are or would
be taken into account in determining the
amount of disregarded payment loss or
disregarded payment income, and exclude
items that are regarded for U.S. tax purposes.
(ii) Failure to comply with certification
requirements. A failure by the DPE owner
of the disregarded payment entity to comply with the certification requirements of
paragraphs (d)(4)(i) and (ii) of this section.
(4) Certification requirements. Except
as otherwise provided in publications,
forms, instructions, or other guidance,
a DPE owner of a disregarded payment entity is subject to the certification
requirements of this paragraph (d)(4) with
respect to a disregarded payment loss of
the disregarded payment entity.
(i) For its taxable year that includes
the date on which the foreign taxable year
in which a disregarded payment loss is
incurred ends, the DPE owner must attach
with its timely filed tax return a certification labeled “Initial Disregarded Payment Loss Certification Under Section
1503(d),” which must contain—
(A) The information set forth in §
1.1503(d)-6(c)(2)(ii) (determined by substituting the phrase “disregarded payment
entity” for the phrase “separate unit”);
(B) A statement of the amount of the
disregarded payment loss; and
(C) A statement that a foreign use of the
disregarded payment loss has not occurred
during the DPL certification period.
(ii) During the DPL certification
period, for each of its taxable years after
the taxable year described in paragraph
(d)(4)(i) of this section that includes a
date on which a foreign taxable year ends,
the DPE owner must attach with its timely
filed tax return a certification labeled

891

“Annual Disregarded Payment Loss Certification Under Section 1503(d)” and satisfying the requirements of this paragraph
(d)(4)(ii). Certifications with respect to
multiple disregarded payment losses may
be combined in a single certification,
but each disregarded payment loss must
be separately identified. To satisfy the
requirements of this paragraph (d)(4)(ii),
the certification must—
(A) Identify the disregarded payment
loss to which it pertains by setting forth
the foreign taxable year in which the disregarded payment loss was incurred and
the amount of such disregarded payment
loss;
(B) State that there has been no foreign
use of the disregarded payment loss; and
(C) Warrant that arrangements have
been made to ensure that there will be
no foreign use of the disregarded payment loss and that the DPE owner will be
informed of any such foreign use.
(iii) If a disregarded payment entity
has a balance in its DPL cumulative register upon a DPL triggering event and
the DPE owner includes in gross income
a DPL inclusion amount that is less than
the amount of the disregarded payment
loss, the DPE owner of the disregarded
payment entity must attach a statement
labeled “Reduction of Disregarded
Payment Loss Amount Under Section
1503(d)” to its income tax return for the
taxable year in which the triggering event
occurs and provide any other information
as requested by the Commissioner. The
statement must show the disregarded payment income or disregarded payment loss
of the disregarded payment entity for each
foreign taxable year (other than a foreign
taxable year where the entity or branch
is not a disregarded payment entity) up
to and including the foreign taxable year
with respect to which the triggering event
occurs.
(iv) If a DPE owner claims an allowed
deduction with respect to a suspended
deduction, the DPE owner must attach a
statement labeled “Release of Suspended
Deduction Under Section 1503(d)” to the
income tax return for the taxable year in
which the deduction is allowed and provide any other information as requested
by the Commissioner, including in regulations, forms, instructions or other guidance. The statement must describe the

February 24, 2025

DPE owner’s DPL inclusion amount to
which the suspended deduction relates
and show the disregarded payment
income or disregarded payment loss of
the disregarded payment entity for each
foreign taxable year up to and including
the foreign taxable year during which the
deduction is allowed.
(5) Definitions. The following definitions apply for purposes of this paragraph
(d).
(i) The term disregarded payment entity
means, with respect to a DPE owner, any
entity, foreign branch, or dual resident
corporation described in paragraph (d)(5)
(i)(A), (B), (C) or (D) of this section.
(A) A disregarded entity that is a foreign tax resident and related to the DPE
owner, provided that the DPE owner
directly or indirectly owns interests in the
disregarded entity.
(B) A foreign branch of the DPE owner
and a foreign branch of an entity that is
related to the DPE owner and in which the
DPE owner directly or indirectly owns an
interest.
(C) An entity that is treated as a partnership for U.S. tax purposes that is a foreign
tax resident and related to the DPE owner,
provided that the DPE owner directly or
indirectly owns an interest in the entity.
(D) The DPE owner itself if it is a dual
resident corporation.
(ii) The terms disregarded payment
income and disregarded payment loss
have the meanings set forth in this paragraph (d)(5)(ii). For purposes of computing the disregarded payment income or
disregarded payment loss of a disregarded
payment entity, a DPE owner takes into
account the disregarded payment income
or disregarded payments loss of each disregarded payment entity for each foreign
taxable year that ends with or within its
U.S. taxable year and an item is taken into
account only if it gives rise to income or
a deduction under the relevant foreign tax
law during the portion of the foreign taxable year in which the entity or foreign
branch is a disregarded payment entity; for
purposes of allocating an item to a period,
the principles of § 1.1502-76(b) apply.
Thus, for example, if a DPE owner with
a calendar U.S. taxable year becomes subject to the disregarded payment loss rules
for the U.S. taxable year beginning on
January 1, 2026, the disregarded payment

February 24, 2025

income or disregarded payment loss of a
disregarded payment entity of the DPE
owner with a foreign taxable year ending
on June 30, 2026, excludes items allocated (under the principles of § 1.150276(b)) to the pre-January 1, 2026, portion
of that foreign taxable year. Items taken
into account in computing disregarded
payment income or disregarded payment
loss are calculated in the currency used to
determine tax under the relevant foreign
tax law. See § 1.1503(d)-7(c)(46) for an
example illustrating items that are taken
into account in determining disregarded
payment income or disregarded payment
loss.
(A) Disregarded payment income. Disregarded payment income means, with
respect to a disregarded payment entity
and a foreign taxable year of the entity,
the excess (if any) of the sum of the items
described in paragraph (d)(5)(ii)(D) of
this section over the sum of the items
described in paragraph (d)(5)(ii)(C) of this
section.
(B) Disregarded payment loss. Subject
to the de minimis rule set forth in paragraph (d)(6)(vii) of this section, a disregarded payment loss means, with respect
to a disregarded payment entity and a foreign taxable year of the entity, the excess
(if any) of the sum of the items described
in paragraph (d)(5)(ii)(C) of this section
over the sum of the items described in
paragraph (d)(5)(ii)(D) of this section.
(C) Items of deduction. With respect
to a disregarded payment entity and a
foreign taxable year of the entity, an item
is described in this paragraph (d)(5)(ii)
(C) to the extent that it satisfies all of the
requirements set forth in paragraphs (d)
(5)(ii)(C)(1) through (3) of this section.
In addition, an item of a disregarded payment entity described in paragraph (d)
(5)(i)(A) of this section is described in
this paragraph (d)(5)(ii)(C) if, under the
relevant foreign tax law, it is a deduction
with respect to equity (including deemed
equity) allowed to the entity in such taxable year (for example, a notional interest
deduction) or a deduction for an imputed
interest payment with respect to a debt
instrument (such as a deduction for an
imputed interest payment with respect to
an interest-free loan).
(1) Under the relevant foreign tax law,
the disregarded payment entity is allowed

892

a deduction in such taxable year for the
item.
(2) The payment, accrual, or other
transaction giving rise to the item is disregarded for U.S. tax purposes as a transaction between a disregarded entity and its
tax owner or between disregarded entities
with the same tax owner (for example, a
payment by a disregarded entity to its tax
owner or to another disregarded entity
owned by its tax owner, a payment from a
dual resident corporation or partnership to
a disregarded entity it owns, or a payment
from the home office of a foreign branch
to a disregarded entity the home office
owns that is attributable to the foreign
branch).
(3) If the payment, accrual, or other
transaction were regarded for U.S. tax
purposes, it would be interest, a structured
payment, or a royalty within the meaning
of § 1.267A-5(a)(12), (b)(5)(ii), or (a)
(16), respectively.
(D) Items of income. With respect to
a disregarded payment entity and a foreign taxable year of the entity, an item is
described in this paragraph (d)(5)(ii)(D) to
the extent that it satisfies all of the requirements set forth in paragraphs (d)(5)(ii)(D)
(1) through (3) of this section.
(1) Under the relevant foreign tax law,
the disregarded payment entity includes
the item in income in such taxable year.
(2) The payment, accrual, or other
transaction giving rise to the item is disregarded for U.S. tax purposes as a transaction between a disregarded entity and its
tax owner or between disregarded entities
with the same tax owner (for example,
because it is a payment to a disregarded
entity from the disregarded entity’s tax
owner or from another disregarded entity
of its tax owner, a payment to a dual resident corporation or partnership from a disregarded entity it owns, or a payment from
a disregarded entity to the home office of
a foreign branch that is attributable to the
foreign branch).
(3) If the payment, accrual, or other
transaction were regarded for U.S. tax
purposes, it would be interest, a structured
payment, or a royalty with the meaning of
§ 1.267A-5(a)(12), (b)(5)(ii), or (a)(16),
respectively.
(E) Translation into U.S. dollars. The
amount of disregarded payment income or
disregarded payment loss with respect to a

Bulletin No. 2025–9

foreign taxable year of a disregarded payment entity is translated into U.S. dollars
using the yearly average exchange rate
(within the meaning of § 1.987-1(c)(2))
for that foreign taxable year.
(F) Royalties under pre-August 6,
2024 licenses excluded. Royalties paid or
accrued pursuant to a license agreement
entered into before August 6, 2024, are
not taken into account when determining the amount of disregarded payment
income or disregarded payment loss. The
preceding sentence ceases to apply with
respect to any such agreement upon the
significant modification of any terms of
the agreement, such as a change in the
licensor or licensee or a significant modification of the rights in consideration for
which the royalties are paid. In such case,
any amounts paid or accrued on or after
the date of the significant modification are
taken into account when determining the
amount of disregarded payment income
or disregarded payment loss. Termination
of a license agreement and re-entry into a
license agreement between the same parties and with the same terms (other than
the term governing the period covered by
the agreement), an extension of the period
covered by a license agreement without
modification of other terms, or an alteration of a legal right or obligation that
occurs by operation of the terms of the
license agreement (for example, where
the license agreement provides for updating the royalty based on updated transfer
pricing studies), will not be considered a
significant modification of the first license
agreement. For purposes of this paragraph
(d)(5)(ii)(F), a combined disregarded payment entity is treated as a single licensor
or licensee, as the case may be.
(iii) The term DPL certification period
includes, with respect to a disregarded
payment loss, the foreign taxable year in
which the disregarded payment loss is
incurred, any prior foreign taxable years,
and, except as provided in paragraph
(d)(6)(iii) of this section, the 60-month
period following the foreign taxable year
in which the disregarded payment loss is
incurred.
(iv) The term foreign branch means a
branch (within the meaning of § 1.267A5(a)(2)) that gives rise to a taxable presence under the tax law of the foreign
country where the branch is located.

Bulletin No. 2025–9

(v) The term foreign taxable year
means, with respect to a disregarded payment entity, the entity’s taxable year for
purposes of a relevant foreign tax law.
(vi) The term foreign tax resident
means a tax resident (within the meaning of § 1.267A-5(a)(23)(i)) of a foreign
country.
(vii) The term related has the meaning provided in this paragraph (d)(5)(vii).
A person is related to a DPE owner if
the person is a related person within the
meaning of section 954(d)(3) and the regulations thereunder, determined by treating the person as the “controlled foreign
corporation” referred to in that section.
In addition, for purposes of determining
relatedness, a disregarded entity is treated
as a corporation.
(viii) The term relevant foreign tax
law means, with respect to a disregarded
payment entity, any tax law of a foreign
country of which the entity is a tax resident (within the meaning of § 1.267A-5(a)
(23)(i)) or, in the case of a disregarded
payment entity that is a foreign branch,
the tax law of the foreign country where
the branch is located.
(ix) The term DPE owner has the
meaning provided in paragraph (d)(1) of
this section, and includes any successor to
the corporation described paragraph (d)(1)
of this section.
(6) Special rules―(i) Disregarded
payment entity combination rule. For
purposes of this paragraph (d), disregarded payment entities for which the
relevant foreign tax law is the same
(for example, because the entities are
tax residents of the same foreign country) are combined and treated as a combined disregarded payment entity under
the principles of paragraph (b)(4)(ii)
of this section, provided that the entities have the same foreign taxable year
and are owned, or interests in which are
directly or indirectly owned, either by
the same DPE owner or by DPE owners
that are members of the same consolidated group. However, this paragraph
(d)(6)(i) does not apply with respect to
a dual resident corporation treated as a
disregarded payment entity pursuant to
paragraph (d)(5)(i)(D) of this section.
In determining the disregarded payment
income or disregarded payment loss of
a combined disregarded payment entity,

893

the principles of § 1.1503(d)-5(c)(4)(ii)
apply. Thus, for example, if multiple
individual disregarded payment entities
are treated as a combined disregarded
payment entity pursuant to this paragraph (d)(6)(i), then the combined disregarded payment entity has either a single
amount of disregarded payment income
or a single amount of disregarded payment loss.
(ii) Partial ownership of disregarded
payment entity. If a DPE owner of a disregarded payment entity indirectly owns
through a partnership less than all the
interests in that disregarded payment
entity, then the rules of this paragraph (d)
are applied based on the DPE owner’s
proportionate interest in the disregarded
payment entity. In such a case, as to the
DPE owner, only a proportionate share
of the disregarded payment entity’s items
of deduction or income are taken into
account in computing disregarded payment income or disregarded payment loss
of the entity. In addition, with respect to
the disregarded payment loss as so computed, the DPE owner must comply with
the certification requirements of paragraph (d)(4) of this section and, upon a
triggering event, directly include in gross
income an amount equal to the DPL inclusion amount.
(iii) Termination of DPL certification
period. With respect to a disregarded
payment loss of a disregarded payment
entity, the DPL certification period does
not include any date after the end of the
DPE owner’s taxable year during which
the DPE owner, or a person related to the
DPE owner, no longer owns directly or
indirectly any of the interests in the disregarded payment entity, or, in the case
of a disregarded payment entity that is
a foreign branch, substantially all of the
assets of the foreign branch. In such a
case, the DPE owner ceases to be subject
to the rules of paragraph (d) of this section
with respect to the disregarded payment
loss; thus, for example, after the end of
such taxable year the DPE owner is not
subject to the certification requirements
of paragraph (d)(4)(ii) of this section with
respect to the loss, and will not be required
to include in gross income the DPL inclusion amount with respect to such loss. The
DPL certification period will also terminate with respect to a disregarded pay-

February 24, 2025

ment loss upon a DPE owner’s inclusion
of the DPL inclusion amount attributable
to the disregarded payment loss.
(iv) Agent for a consolidated group. If
a DPE owner is a member of a consolidated group, see § 1.1502-77 for agent
of the group rules (generally treating the
common parent as the agent of its consolidated group).
(v) Coordination with foreign hybrid
mismatch rules. Whether a disregarded
payment entity is allowed a deduction
under a relevant foreign tax law is determined with regard to hybrid mismatch
rules, if any, under the relevant foreign
tax law. Thus, for example, if a relevant
foreign tax law denies a deduction for an
item to prevent a deduction/no-inclusion
outcome (that is, a payment that is deductible for the payer jurisdiction and is not
included in the ordinary income of the
payee), the item is not taken into account
for purposes of computing the amount
of disregarded payment income or disregarded payment loss. For this purpose, the
term hybrid mismatch rules has the meaning provided in § 1.267A-5(a)(10).
(vi) DPL inclusion amount and suspended deduction not taken into account
for dual consolidated loss purposes. A
DPL inclusion amount included in the
gross income of a DPE owner, and any
allowed amount of a suspended deduction
attributable to a DPL inclusion amount,
are not taken into account for purposes of
determining the income or dual consolidated loss of the dual resident corporation,
or the income or dual consolidated loss
attributable to the separate unit, under §
1.1503(d)-5(b) or (c).
(vii) De minimis rule. A disregarded
payment entity will be deemed to have no
disregarded payment loss with respect to
a foreign taxable year in which the conditions in paragraphs (d)(6)(vii)(A) and (B)
of this section are satisfied.
(A) The items that compose the disregarded payment loss are incurred in
connection with the conduct of an active
trade or business (within the meaning of
§ 1.367(a)-2(d)(2) and (3), but for this
purpose treating the disregarded payment
entity as the foreign corporation referenced therein) carried on by the disregarded payment entity. For purposes of the
preceding sentence, the determination of
whether items are incurred in connection

February 24, 2025

with an active trade or business is made
under § 1.367(a)-2(d)(5), but for this purpose by treating the property received by
the disregarded payment entity pursuant to
the arrangement that gave rise to the item
(such as cash or the rights to use the intangible property) as the property described
in such section.
(B) The amount of the disregarded
payment loss is less than the lesser of $3
million or 10 percent of the aggregate
amount of all the items of the disregarded
payment entity for the foreign taxable
year that satisfy the condition described in
paragraph (d)(5)(ii)(C)(1) of this section.
For this purpose, the items of the disregarded payment entity may include, for
example, items that are regarded for both
U.S. and foreign tax purposes, or foreign
law items that if regarded for U.S. tax purposes would not be treated as interest, a
structured payment, or a royalty within the
meaning of § 1.267A-5(a)(12), (b)(5)(ii),
or (a)(16), respectively.
*****
(e) Special rules for filings. * * *
*****
(f) Anti-avoidance rule—(1) In general. Except to the extent provided in
paragraph (f)(2) of this section, if a transaction, series of transactions, plan, or
arrangement is engaged in with a view
to avoid the purposes of the rules in
this section and §§ 1.1503(d)-2 through
1.1503(d)-8, then appropriate adjustments will be made. A transaction, series
of transactions, plan, or arrangement
(including an arrangement to reflect, or
not reflect, items on books and records) is
engaged in with a view to avoid the purposes of this section and §§ 1.1503(d)-2
through 1.1503(d)-8 only if it results in a
double deduction or similar outcome (for
example, by putting an item of deduction
or loss that composes (or would compose)
a dual consolidated loss to both a domestic use and a foreign use (determined
under §§ 1.1503(d)-2 and 1.1503(d)-3,
respectively) or putting a foreign law item
of deduction or loss that is disregarded
for U.S. tax purposes to a foreign use).
The appropriate adjustments may include
adjustments to disregard the transaction,
series of transactions, plan, or arrangement, or adjustments to modify the items
that are taken into account for purposes of
determining the income or dual consoli-

894

dated loss of or attributable to a dual resident corporation or a separate unit, or for
purposes of determining income or loss
of an interest in a transparent entity under
§ 1.1503(d)-5. See § 1.1503(d)-7(c)(43)
through (45) for examples illustrating the
application of this paragraph (f).
(2) Exceptions. The anti-avoidance rule
in paragraph (f)(1) of this section does not
apply to a reduction or elimination of a
dual consolidated loss solely by reason of
intercompany transactions as described in
§ 1.1502-13, items of income arising from
the ownership of stock and taken into
account under § 1.1503(d)-5(b)(1) or (c)
(4)(iv), or the attribution to a hybrid entity
separate unit or an interest in a transparent
entity of items that have not been and will
not be reflected on the entity’s books and
records. The anti-avoidance rule in paragraph (f)(1) of this section also does not
apply with respect to the application of the
dual consolidated loss rules to the GloBE
Model Rules, or to cause a foreign use of
a dual consolidated loss to occur solely in
a period before the taxable year in which
such loss was incurred.
*****
Par. 3. Section 1.1503(d)-3 is amended
by:
1. Revising and republishing paragraph
(c)(3).
2. Adding paragraph (e)(4).
The revision and addition read as follows:
§ 1.1503(d)-3 Foreign use.
*****
(c) * * *
(3) Deemed ordering rule—(i) In general. This paragraph (c)(3) applies if the
losses or deductions composing the dual
consolidated loss are made available under
the laws of a foreign country both in part
to offset income or gain that would constitute a foreign use and in part to offset
income or gain that would not constitute
a foreign use. In such a case, the losses
or deductions shall be deemed to be made
available to offset the income or gain
that does not constitute a foreign use, to
the extent of such income or gain, before
being considered to be made available to
offset the income or gain that does constitute a foreign use. See § 1.1503(d)-7(c)
(11) (Example 11).

Bulletin No. 2025–9

(ii) Limitation. For purposes of
applying this paragraph (c)(3), items of
income or gain are taken into account
only to the extent such items are or
would be taken into account in determining the amount of income or dual
consolidated loss under § 1.1503(d)-5(b)
or (c). Thus, for example, this paragraph
does not apply with respect to items of
income or gain that are otherwise disregarded for U.S. tax purposes. But see
§ 1.1503(d)-1(d)(3)(i), which provides
that when applying the principles of this
rule for purposes of the disregarded payment loss rules, the only relevant items
are those that are or would be taken into
account for purposes of determining a
disregarded payment loss or disregarded
payment income.
*****
(e) * * *
(4) Exception for disregarded payment
losses. Paragraph (e)(1) of this section
will not apply so as to deem a foreign use
of a disregarded payment loss (within the
meaning of § 1.1503(d)-1(d)(5)(ii)(B)).
Par. 4. Section 1.1503(d)-7 is amended
by:
1. Adding a sentence after the first sentence in paragraph (c)(6)(iii)(B);
2. Revising the (c)(11) paragraph heading;
3. Removing the last sentence in paragraph (c)(11)(i);
4. In the first sentence of paragraph
(c)(11)(ii), removing the language
“§1.1503(d)-3(c)(3)” and adding in its
place the language Ҥ 1.1503(d)-3(c)(3)
(i)”.
5. Adding a sentence after the third sentence in paragraph (c)(23)(ii).
6. In paragraph (c)(25)(ii)(B), adding a
sentence after the fifth sentence.
7. Adding paragraphs (c)(42) through
(c)(46).
The revisions and additions read as follows:
§ 1.1503(d)-7 Examples.
*****
(c) * * *
(6) * * *
(iii) * * *
(B) * * * But see § 1.1503(d)-1(d),
which takes into account certain payments
that are otherwise disregarded for pur-

Bulletin No. 2025–9

poses of section 1503(d) and the regulations thereunder. * * *
*****
(11) Example 11. No foreign use—
deemed ordering rule. ***
*****
(23) * * *
(ii) * * * But see § 1.1503(d)-1(d),
which takes into account certain payments
that are otherwise disregarded for purposes of section 1503(d) and the regulations thereunder. * * *
*****
(25) * * *
(ii) * * *
(B) * * * But see § 1.1503(d)-1(d),
which takes into account certain payments
that are otherwise disregarded for purposes of section 1503(d) and the regulations thereunder. * * *
*****

(42) Example 42. Disregarded payment loss
rules – triggering event resulting in DPL inclusion
amount and suspended deduction―(i) Facts. P owns
DE1X, and DE1X owns FSX. In year 1, DE1X pays
$100x to P pursuant to a note. For U.S. tax purposes,
the payment is disregarded as a transaction between
DE1X and P, but if the payment were regarded it
would be interest within the meaning of § 1.267A5(a)(12). Under Country X tax law, the $100x is
interest for which DE1X is allowed a deduction in
year 1. In year 1, pursuant to a Country X group
relief regime, DE1X’s $100x deduction is made
available to offset income of FSX. At the end of year
1, DE1X extinguishes the note by repaying the outstanding principal. In year 2, P enters into a licensing
arrangement with DE1X pursuant to which P makes
a $60x payment to DE1X in each of years 2 and 3.
For U.S. tax purposes, the payment is disregarded as
a transaction between DE1X and P, but if the payment were regarded it would be a royalty within the
meaning of § 1.267A-5(a)(16). Under Country X tax
law, the $60x is a royalty and included in the income
of DE1X in years 2 and 3.
(ii) Result.—(A) Year 1. Because P owns all of
the interests in DE1X, a disregarded entity, P is a
DPE owner. See § 1.1503(d)-1(d)(1). In addition,
DE1X, a disregarded payment entity with respect
to P, incurs a $100x disregarded payment loss with
respect to its Country X taxable year for year 1. See
§ 1.1503(d)-1(d)(5)(i)(A) and (d)(5)(ii)(B). DE1X’s
$100x deduction being made available to offset
income of FSX pursuant to the Country X group
relief regime constitutes a foreign use of, and thus
a triggering event with respect to, the disregarded
payment loss during the DPL certification period.
See § 1.1503(d)-1(d)(3)(i) and (d)(5)(iii). As a result,
in year 1, P must include in gross income $100x,
the DPL inclusion amount with respect to the disregarded payment loss. See § 1.1503(d)-1(d)(1) and
(d)(2)(i). The $100x DPL inclusion amount is treated
for U.S. tax purposes as ordinary interest income,
the source and character of which is determined as
if DE1X were a foreign corporation, and the amount

895

were interest income paid by the foreign corporation to P. See § 1.1503(d)-1(d)(2)(iv)(A). The result
would be the same if DE1X recognized income in
year 1 that was regarded for both U.S. and Country X
tax purposes, or if P made payments (other than interest, structured payments, or royalties) to DE1X that
were disregarded for U.S. tax purposes but regarded
for Country X tax purposes. See § 1.1503(d)-1(d)(3)
(i) (describing the application of the principles of the
deemed ordering rule in § 1.1503(d)-3(c)(3)).
(B) Years 2 and 3. In year 2, P establishes a suspended deduction of $100x related to the year 1 DPL
inclusion amount. See § 1.1503(d)-1(d)(1) and (d)(2)
(ii). In each of years 2 and 3, DE1X derives $60x
of disregarded payment income with respect to its
Country X taxable year. See § 1.1503(d)-1(d)(5)
(ii)(A). For year 2, P is allowed a $60x deduction
with respect to the suspended deduction, and $40x
remains suspend

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3A1a6f8acb445bc4a9. Public record. Not legal advice.