On Dec. 20, 2018, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations (REG-104352-18) (the Proposed Regulations) implementing sections of the Internal Revenue Code that were added last year with the enactment of the Tax Cuts and Jobs Act (TCJA). The Proposed Regulations address sections 245A(e) and 267A regarding hybrid dividends and certain amounts paid or accrued in hybrid transactions or with hybrid entities. The Proposed Regulations will affect taxpayers that claim deductions related to certain hybrid transactions, such as the issuance or receipt of dividends. Once published in the Federal Register, the Proposed Regulations will be open for public comment for 60 days, after which, the regulations may be issued as final.
The Proposed Regulations enact what are generally referred to as ‘anti-hybrid rules.’ These rules target cross-border transactions that may be treated differently for U.S. and foreign tax purposes, because of differences in the various tax laws. Such arrangements have long been the target of international policy makers. The OECD’s Base Erosion and Profit Shifting (BEPS) project featured two reports addressing hybrid and branch mismatch arrangements. Generally, under the Proposed Regulations companies would not be allowed a deduction for dividends received if there was a benefit received from another country’s tax rules. Companies would also not be allowed any direct or indirect foreign tax credits for such dividends. Similarly, interest and royalty deductions in the U.S. could be denied if those payments go to a jurisdiction where local law allows for a deduction or no-inclusion.
These Proposed Regulations are highly technical and may have a significant impact on taxpayers with hybrid entity structures. Taxpayers should examine the Proposed Regulations closely with their advisors immediately to understand their impact, and, if necessary, provide comment to Treasury.