The 2017 tax act (Pub. L. No. 115-97) significantly altered the international tax regime in the United States, by implementing rules designed to combat the use of hybrid entities and hybrid arrangements 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 arrangement 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 (BEPS) project, Neutralising the Effects of Hybrid Mismatch Arrangements.
Treasury and the IRS issued proposed regulations (REG-104352-18) in December 2018, which were finalized in April 2020 (T.D. 9896), with certain revisions. The final regulations address the implementation of §267A and §245A with regard to certain hybrid arrangements and hybrid dividends. The final regulations also provide guidance relating to dual consolidated losses, entity classification, and information reporting. Treasury and the IRS also issued a second set of proposed regulations (REG-106013-19) in April 2020 addressing, among other things, the maintenance of hybrid deduction accounts. This roadmap highlights key takeaways from the hybrid arrangements regulations.
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