Alternative facts. (A) The facts are the same as in paragraph (i) of this Example 6, except as follows. Instead of owning DE1X, P owns DE3Y which, in turn, owns DE1X. In ad- dition, DE3Y, rather than DE1X, is the obli- gor on the third-party loan and therefore in- curs the interest expense on such loan. Fi- xxxxx, DE3Y on-lends the loan proceeds from the third-party loan to DE1X, and DE1X pays interest to DE3Y on such loan that is gen- erally disregarded for U.S. tax purposes.
Alternative facts. The facts are the same as in paragraph (i) of this Example 10, except that FPX is classified as a partnership for U.S. tax purposes. The result would be the same as in paragraph (ii) of this Example 10, because the offset of the income gen- erated by FPX is a foreign use pursuant to § 1.1503(d)–3(a). This is the case because the items constituting such income are consid- ered under U.S. tax principles to be items of F1 and F2, the owners of interests in FPX (a hybrid entity), that are not separate units. Moreover, the result would be the same if F1 and F2 owned their interests in FPX indi- rectly through another partnership.
Alternative facts. The facts are the same as in paragraph (i) of this Example 18, except that the Country X mirror legislation operates in a manner similar to the rules under section 1503(d). That is, it allows the taxpayer to elect to use the loss to either offset income of an affiliate in Country X, or income of an affiliate (or other income of the owner of the Country X branch or permanent establishment) in the other country, but not both. Because the Country X mirror legisla- tion permits the taxpayer to choose to put the dual consolidated loss to a foreign use, it does not deny the opportunity to put the loss to a foreign use. Therefore, there is no deemed foreign use of the dual consolidated loss pursuant to § 1.1503(d)–4(e) and a domes- tic use election can be made for such loss.
Alternative facts. The facts are the same as in paragraph (iii), of this Example 5, except that P only sells 5 percent of its interest in DE1X to F. Pursuant to Rev. Rul. 99–5 (1999– 1 CB 434), see § 601.601(d)(2)(ii)(b) of this chap- ter, the transaction is treated as if P sold 5 percent of its interest in each of DE1X’s as- sets to F, and then immediately thereafter P and F transferred their interests in the as- sets of DE1X to a partnership in exchange for an ownership interest therein. The sale of the 5 percent interest in DE1X generally re- sults in a foreign use triggering event be- cause a portion of the dual consolidated loss carries over under Country X tax law and is available under U.S. tax principles to offset income of the owner of the interest in DE1X, a hybrid entity, which in the hands of F is not a separate unit. It is also a foreign use because the loss is available under U.S. tax principles to offset the income of F, a foreign corporation. See § 1.1503(d)–3(a)(1). However, pursuant to the exception under § 1.1503(d)– 3(c)(5) (relating to a de minimis reduction of an interest in a separate unit), such avail- ability does not result in a foreign use. In ad- dition, pursuant to § 1.1503(d)–6(f)(1) and (3), the deemed transfers pursuant to Rev. Rul. 99–5 as a result of the sale are not treated as triggering events described in § 1.1503(d)– 6(e)(1)(iv) or (v).
Alternative facts. The facts are the same as in paragraph (i) of this Example 2, except that P’s Country X business oper- ations constitute a foreign branch as defined in § 1.367(a)–6T(g)(1), but do not constitute a § 1.1503(d)–7 permanent establishment under the U.S.– Country X income tax convention. Although the activities carried on by P in Country X would otherwise constitute a foreign branch separate unit as described in § 1.1503(d)– 1(b)(4)(i)(A), the exception under § 1.1503(d)– 1(b)(4)(iii) applies because the activities do not constitute a permanent establishment under the U.S.–Country X income tax con- vention. Thus, the Country X business oper- ations do not constitute a foreign branch separate unit, and the year 1 loss is not sub- ject to the dual consolidated loss rules. If P instead carried on its Country X business op- erations through DE1X, then the exception under § 1.1503(d)–1(b)(4)(iii) would not apply because P carries on the business operations through a hybrid entity and, as a result, the business operations would constitute a for- eign branch separate unit. Thus, in such a case the year 1 loss would be subject to the dual consolidated loss rules.
Alternative facts. The facts are the same as in paragraph (i) of this Example 5, except that FSX cannot use the loss of DE1X Internal Revenue Service, Treasury § 1.1503(d)–7 under Country X tax law without an elec- tion, and no such election is made. Pursuant to the exception in § 1.1503(d)–3(c)(2), there is no foreign use of the year 1 dual consolidated loss attributable to P’s interest in DE1X. In addition, P files a domestic use election with respect to the year 1 dual consolidated loss attributable to its interest in DE1X and, at the beginning of year 3, P sells its interest in DE1X to F, a Country Y entity that is a for- eign corporation. The sale of the interest in DE1X to F results in a foreign use triggering event pursuant to § 1.1503(d)–6(e)(1)(i) be- cause, immediately after the sale, the loss attributable to the interest in DE1X carries over under Country X law and, therefore, is available under U.S. tax principles to offset income of the owner of the interest in DE1X which, in the hands of F, is not a separate unit. It is also a foreign use because the loss is available under U.S. tax principles to off- set the income of F, a foreign corporation. See § 1.1503(d)–3(a)(1). Finally, the transfer is a triggering event pursuant to § 1.1503(d)– 6(e)(1)(iv) and (v).
Alternative facts. The facts are the same as in paragraph (i) of this Example 13, except that P also owns FSX. In addition, FSX and HPSX elect to file a consolidated re- turn under Country X law. The exception to foreign use under § 1.1503(d)–3(c)(4) does not apply because there is a foreign use other than by reason of the dual consolidated loss being made available as a result of FSZ’s ownership in HPSX and the allocation or carry forward of the dual consolidated loss as a result of such ownership. That is, the ex- ception does not apply because there is also a foreign use of the dual consolidated loss as a result of FSX and HPSX filing a xxxxxxx- dated return under Country X law.
Alternative facts. The facts are the same as in paragraph (i) of this Example 13, except that at the end of year 2, FSZ contrib- utes cash to HPSX in exchange for additional equity of HPSX. As a result of the contribu- tion, FSZ’s interest in HPSX increases from 20 percent to 30 percent, and P’s interest in HPSX decreases from 80 percent to 70 per- cent. P’s interest in HPSX is reduced within a single 12-month period by 12.5 percent (10/ 80), as compared to P’s interest in HPSX as of the beginning of such 12-month period. Ac- cordingly, pursuant to § 1.1503(d)–3(c)(4)(iii), the exception to foreign use provided under § 1.1503(d)–3(c)(4)(i) does not apply. Therefore, in year 2 there is a foreign use of the $80x year 1 dual consolidated loss attributable to P’s Country X separate unit. Such foreign use constitutes a triggering event in year 2 and the $80x year 1 dual consolidated loss is recaptured. Alternatively, if FSZ were a do- mestic corporation, there would not be a for- eign use of the $80x year 1 dual consolidated loss because the loss would not be available to offset income that, under U.S. tax prin- ciples, is income of a foreign corporation or a direct or indirect owner of an interest in a hybrid entity that is not a separate unit.
Alternative facts. The facts are the same as in paragraph (i) of this Example 17, except that P owns DE1X (rather than DRCX) and, in year 1, there is a $100 dual xxxxxxx- dated loss attributable to P’s interest in DE1X (rather than of DRCX). The Country X mirror legislation only applies to Country X dual resident corporations and, therefore, does not apply to losses attributable to P’s interest in DE1X. As a result, the mirror leg- islation rule under § 1.1503(d)–3(e) would not deny the opportunity of such loss from being put to a foreign use (for example, by offset- ting the income of FSX through the Country X consolidation regime).
Alternative facts. The facts are the same as in paragraph (i) of this Example 19, except that the Country X mirror legislation also applies to losses attributable to DE1X, but the mirror agreement does not apply to such losses. The mirror legislation rule would apply with respect to P’s interest in DE1X and, as a result, there is a deemed for- eign use of the dual consolidated loss attrib- utable to the Country X separate unit and a domestic use election cannot be made for such loss. This is the case even though, pur- suant to § 1.1503(d)–5(c)(4)(ii)(A), P’s interest in DE1X (which is subject to the Country X mirror legislation) does not, as an individual separate unit, have a dual consolidated loss in year 1. Further, the stand-alone exception to the mirror legislation rule in § 1.1503(d)– 3(e)(2) does not apply because, absent the mirror legislation, the Country X combined separate unit’s dual consolidated loss would be available in the year incurred for a for- eign use (as defined in § 1.1503(d)–3) because it could be used to offset income of FSX under the Country X consolidation regime. This is the case even if Country X requires an elec- tion to consolidate and no such election is made. The result would be the same even if Country X did not recognize DE1X as having a loss.
