The Treasury Department and the IRS said Aug. 20 that they intend to issue proposed regulations withdrawing the disregarded payment loss rules and related modifications to the dual consolidated loss rules that were finalized toward the end of the Biden administration.
The DPL rules were aimed to prevent double deductions that could otherwise occur through payments involving foreign disregarded entities and their U.S. owners.
“Disregarded payment losses refer to deductions recognized under foreign tax laws that arise from payments between a disregarded entity and its U.S. owner. For example, if a foreign branch of a U.S. corporation makes a payment to its owner, that payment may be deductible under the foreign jurisdiction’s tax laws but disregarded for U.S. tax purposes,” specialty tax consulting firm McGuire Sponsel noted in a blog on the DPL rules, which were finalized by the Treasury Department and the IRS on Jan. 14. “The concern? These payments can result in double deductions—once in the foreign jurisdiction and again in the U.S.”
According to McGuire Sponsel, the finalized regulations introduced a certification process for U.S. corporations with foreign disregarded entities to manage potential DPLs:
- Initial certification: U.S. owners must disclose the DPL of their foreign disregarded entities on a certification statement when the DPL arises.
- Annual certifications: For a 60-month period, U.S. owners must file annual certifications confirming that no foreign tax deduction has been taken for the DPL.
Failure to comply with this certification process would trigger an income inclusion requirement, meaning the U.S. owner must recognize the DPL as income in the year of noncompliance, the blog post states.
To offset DPL inclusions, disregarded payment entity owners could claim a deduction for disregarded payment income in a subsequent year, up to the amount of the prior DPL inclusion. The final rules also ended the certification period once a DPL inclusion occurs to avoid double counting.
The Treasury Department, under the direction of the Trump administration, has now determined that disregarded payments should not trigger income inclusions and announced in Notice 2025-44 that it would be withdrawing the final DPL regulations.
“This is a welcome relief for companies,” law firm McDermott, Will & Schulte stated in an Aug. 27 blog post about the withdrawal of the DPL rules. “Although many taxpayers have restructured their disregarded loans and licensing arrangements to avoid having income inclusions under the DPL rules, not all taxpayers have been able to do so. Withdrawing the DPL rules gives taxpayers greater flexibility to engage in business operations using disregarded entities without the risk of a U.S. income inclusion.”
Following the publication of the 2025 final regulations, the Treasury Department and the IRS received feedback recommending the removal of the DPL rules, focusing on the complexity, uncertainty, and costs of complying with the DPL rules and of unwinding existing structures in response to the rules, Notice 2025-44 says.
“The Treasury Department and the IRS share these concerns,” the notice states. “In addition, the feedback questioned the authority for the DPL rules, asserting that the DPL rules are a significant departure from longstanding principles of the Code, are inconsistent with the statute, and conflict with congressional intent.”
Notice 2025-44 announces that the Treasury Department and the IRS plan to issue proposed regulations withdrawing the DPL rules under Section 1.1503(d)-1(d) of the Internal Revenue Code. The DPL rules were set to take effect with respect to losses incurred in taxable years starting on or after Jan. 1, 2026.
In addition, the notice announces an extension of the transition relief initially announced in Notice 2023-80 with respect to the interaction of the dual consolidated loss rules and the model rules published by the OECD/G20 Inclusive Framework on BEPS, known as the “GloBE Model Rules.”
The notice also extends the transition relief because the dual consolidated loss rules would generally be applied without respect to the GloBE Model Rules for losses incurred in taxable years beginning before Jan. 1, 2028.
“Transitional relief was originally provided so that taxpayers would not have to recapture a dual consolidated loss that was deemed to have a ‘foreign use’ because of certain taxes imposed under the Pillar Two regime,” the McDermott, Will & Schulte blog post states. “Pillar Two taxes generally apply on a jurisdiction-by-jurisdiction basis and require mandatory blending within a single jurisdiction. There was concern that such blending could cause a dual consolidated loss (even one that was not deductible under foreign domestic law) to be made available for foreign use and be recaptured automatically. This transitional relief now applies to dual consolidated losses incurred in tax years beginning before January 1, 2028. Taxpayers have two extra years before Pillar Two taxes could cause them to have foreign use of their dual consolidated losses.”
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Tags: corporate tax, deductions, IRS, Taxes, Treasury Department
