§267A Certain Related Party Amounts Paid or Accrued in Hybrid Transactions or with Hybrid Entities

Summary

You cannot take a tax deduction for interest or royalty payments to a related party when those payments come from a hybrid deal or involve a hybrid entity. A "disqualified related party amount" is interest or royalties paid to a related person that either is not taxed where that person pays tax, or that person is allowed a deduction for it there. Payments that are counted as a U.S. shareholder’s income under section 951(a) are not treated as disqualified. "Related party" uses the rule in section 954(d)(3) applied to the payer. A "hybrid transaction" is one where the payment counts as interest or royalties for U.S. tax but not in the recipient’s country. A "hybrid entity" is an entity treated as transparent (flows through) for U.S. tax but not abroad, or vice versa. The Treasury must write rules to cover conduit and structured deals, branches and domestic entities, when big tax preferences count as exclusions (including any cut that lowers the normal rate by 25% or more), when whole payments are disqualified under participation-exemption systems, how to decide a foreign entity’s tax residence, limited exceptions where another foreign country taxes the amount, and extra record-keeping and reporting beyond section 6038A.