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On January 10, 2025, the U.S. Treasury and IRS finalized regulations (TD 10026) addressing disregarded payments that give rise to deductions for foreign tax purposes. These rules introduce the concept of disregarded payment losses (DPL), which operate independently from the longstanding dual consolidated loss (DCL) rules.

 

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Final Regulations on Disregarded Payment Losses: Key Updates for U.S. Corporations with Foreign Disregarded Entities

On January 10, 2025, the U.S. Treasury and IRS finalized regulations (TD 10026) addressing disregarded payments that give rise to deductions for foreign tax purposes. These rules introduce the concept of disregarded payment losses (DPL), which operate independently from the longstanding dual consolidated loss (DCL) rules. The DPL rules aim to prevent double deductions that could otherwise occur through payments involving foreign disregarded entities (DREs) and their U.S. owners.

What Are Disregarded Payment Losses?

Disregarded payment losses refer to deductions recognized under foreign tax laws that arise from payments between a DRE 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.

The concern? These payments can result in double deductions — once in the foreign jurisdiction and again in the U.S.

Key Requirements under the New Rules

The finalized regulations introduce a certification process for U.S. corporations with foreign DREs to manage potential DPLs:

  • Initial Certification: U.S. owners must disclose the DPL of their foreign DRE 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 will trigger an income inclusion requirement, meaning the U.S. owner must recognize the DPL as income in the year of non-compliance.

To offset DPL inclusions, DPE owners may claim a deduction for disregarded payment income (DPI) in a subsequent year, up to the amount of the prior DPL inclusion. The final rules also end the certification period once a DPL inclusion occurs to avoid double counting.

Modifications from the Proposed Regulations

The final rules incorporate several changes in response to public comments, simplifying key provisions:

  • The regulations retain the term disregarded payment entity (DPE) owner and remove prior consent requirements.
  • A de minimis exception excludes royalties from the DPL rules if the license agreement was executed before the proposed regulations.
  • The IRS clarified that foreign branches and partnerships treated as foreign tax residents can qualify as DPEs if they generate deductible payments under foreign law.

When Do the New Rules Take Effect?

The DPL regulations will apply to payments made in tax years beginning on or after January 1, 2026. This gives businesses time to adjust their reporting processes and ensure compliance with the new requirements.

What Are the Implications for Multinationals?

The DPL rules primarily target multinational enterprises with foreign branches or disregarded entities. These rules complement the anti-avoidance measures within the dual consolidated loss framework by ensuring that deductions are not exploited across jurisdictions to reduce taxable income in the U.S. and abroad.

Next Steps for Businesses

To prepare for the DPL rules, U.S. corporations with foreign DREs should:

  1. Review their existing structures to identify payments that could give rise to a DPL.
  2. Implement certification processes to track and report DPLs accurately.
  3. Consult with tax advisors to understand how these new rules interact with existing DCL regulations and other foreign tax credit considerations.

The IRS’s push to strengthen international tax compliance continues with these regulations, emphasizing transparency and preventing aggressive tax planning. As the 2026 effective date approaches, businesses should take proactive steps to ensure they’re ready to meet the new disclosure requirements and avoid potential income inclusions.

Please contact our Global Business Services team if you have any questions or concerns about these regulations or any other international tax issue.

Greg Lambrecht, CPA is a Shareholder in the firm’s Global Business Services practice and advises clients on international tax matters including understanding the consequences and opportunities associated with global tax planning decisions. He also assists clients in managing increasingly complex compliance requirements of companies with international operations.

Lambrecht joins McGuire Sponsel from the Big Four with over a decade of experience leading complex international tax projects for Fortune 150 clients and over 20 years of total experience in international tax.

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