Section 267A New Final Anti-Hybrid Regulations

Description

Section 267A combats deduction/no inclusion outcomes (D/NI) related to hybrid transactions and entities intentionally implemented to take advantage of jurisdictional tax differences. The now-final regulations disallow interest and royalty deductions for disqualified hybrid amounts, disqualified imported mismatch amounts, and payments subject to the anti-avoidance rule. Being able to determine whether an arrangement meets these definitions is critical, and not readily apparent, for tax practitioners working with companies transacting internationally.

The rules in Section 267A generally followed OECD's recommendations in its 2015 Base Erosion and Profit Sharing report; however, there are some significant differences. The OECD, for example, does not disallow deductions for imputed interest on interest-free loans.

In addition to the final regulations, proposed regulations issued in April 2020 address hybrid transactions and allocating payments for disqualified deductions under the GILTI provisions. These regulations involve (1) adjustments to hybrid deduction accounts that consider a CFC's earnings and profits included in the income of a U.S. shareholder, (2) requirements for specific anti-conduit rules under Section 881, and (3) updated regulations concerning the deduction allocations related to gap period prepayments in the computation of tested income under GILTI provisions.

Listen as our panel of foreign tax experts explains how to determine which transactions meet the criteria of 267A, the interplay of 267A with OECD's recommendations, and the impact of the final and proposed regulations on hybrid entities and transactions.