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Treatment of Hybrid Arrangements Under Subpart F
In General
On January 16, 1998, the Treasury Department issued Notice 98-11, in which it announced its intention to issue regulations to prevent the use of certain arrangements involving controlled foreign corporations and "hybrid branches" under subpart F. A hybrid branch is regarded as a branch for U.S. tax purposes, but as a separate entity (e.g., a corporation) for foreign tax purposes. On March 23, 1998, temporary and proposed regulations on these matters (T.D. 8767 and REG-104537-97) were issued. The temporary regulations cover transactions involving hybrid branches and equivalent transactions involving partnerships under subpart F. The proposed regulations, in addition to the provisions also contained in the temporary regulations, cover the treatment of a CFC's distributive share of income of a partnership in which a CFC is a partner.
In this Notice, the Treasury and the IRS announce their intention to withdraw the temporary regulations and proposed regulations issued on March 23, 1998 (T.D. 8767 and REG-104537-97). Notice 9811 is also hereby withdrawn. The public hearing announced in the proposed regulations for July 15, 1998, will also be canceled.
Proposed Regulations on Hybrid Transactions
The Treasury and the IRS also hereby announce their intention to issue a notice of proposed rulemaking covering hybrid transactions. Under these proposed regulations, payments (including accruals) between a CFC and its hybrid branch, or between hybrid branches of the CFC, or between a CFC (and its hybrid branch) and the hybrid branch of a related CFC (collectively "hybrid branch payments") will give rise to subpart F income in the circumstances described below. When certain conditions are present, the nonsubpart F income of the CFC, in the amount of the hybrid branch payment, will be recharacterized as subpart F income of the CFC. Those conditions include that: the hybrid branch payment reduces the foreign tax of the payor; the hybrid branch payment would have been foreign personal holding company income if made between separate CFCs; and there is a significant disparity (as described below) between the effective rate of tax on the payment in the hands of the payee and the hypothetical rate of tax that would have applied if the income had been taxed in the hands of the payor.
The proposed...