The IRS released final and proposed rules aimed at curbing hybrid mismatch arrangements, in which companies exploit differences between two countries’ rules to avoid taxes.
- The final rules (T.D. 9896) fall under Section 245A(e),which stops companies from taking a deduction on dividends received when the foreign entity that paid the dividends is also receiving a deduction for paying the dividend. The rules also address Section 267A, which prevents situations where an entity takes a deduction in the U.S. for a payment that isn’t included in its income in another country.
- The proposed rules (REG-106013-19) “adjust hybrid deduction accounts to take into account earnings and profits of a controlled foreign corporation that are included in income by a United States shareholder,” the IRS said.
- Rules preventing hybrid mismatch arrangements were part of the Organization for Economic Cooperation and Development’s project to curb base erosion and profit shifting. The 2017 tax law implemented some of the OECD’s anti-hybrid guidance into the U.S. tax code.
(Updates with additional information throughout.)