The 2017 tax act (Pub. L. No. 115-97) significantly altered the international tax regime in the United States including the implementation of rules designed to combat the use of hybrid entities and hybrid transactions as methods of tax avoidance. Specifically, new §267A disallows certain interest and royalty deductions for disqualified related party amounts paid or accrued pursuant to a hybrid transaction or by, or to, a hybrid entity. Additionally, new §245A, which provides a 100% dividends received deduction (DRD) on the foreign-source portion of any dividends received by a corporate U.S. shareholder from any foreign corporation with a domestic corporation as a U.S. shareholder, also includes rules that disallow the §245A DRD with respect to hybrid dividends. These changes were, in part, in response to international concerns regarding hybrid arrangements, including Action 2 of the OECD’s base erosion and profit shifting project (BEPS), Neutralising the Effects of Hybrid Mismatch Arrangements.
On December 20, 2018, Treasury and the IRS issued proposed regulations (REG-104352-18) that address the implementation of §267A and §245A with regard to certain hybrid arrangements. This roadmap highlights key takeaways from the proposed regulations; it does not contain a comprehensive list of every change.