SECTION 2. BACKGROUND

The DCL rules under section 1503(d) (1) generally provide that a DCL of a domestic corporation cannot reduce the taxable income of a domestic affiliate (a “domestic use”). See §§1.1503(d)-2 and 1.1503(d)-4(b). Similar rules under section 1503(d)(3) apply to “separate units” of domestic corporations, defined as certain foreign branches and interests in hybrid entities. See §1.1503(d)-1(b)(4)(i).

A DCL includes a net operating loss of a dual resident corporation or the net loss of a domestic corporation attributable to a separate unit. See §1.1503(d)-1(b)(5).

Exceptions to the general prohibition against the domestic use of a DCL include a “domestic use election,” by which the taxpayer certifies that there has not been and will not be a “foreign use” of the DCL during a certification period. See §1.1503(d)-6(d). If a foreign use (or other “triggering event”) occurs during the certification period, the DCL must be recaptured and an interest charge is imposed. See §1.1503(d)-6(e)(1). Pursuant to the “all or nothing” principle, any amount of the DCL being put to a foreign use generally would cause the entire amount of the DCL to be recaptured and reported as income. See §1.1503(d)-6(e)(1). A foreign use occurs when any portion of the DCL is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, the income of a foreign corporation or the direct or indirect owner of a hybrid entity that is not a separate unit. See §1.1503(d)-3(a).

On December 11, 2023, the Treasury Department and the IRS released Notice 2023-80, 2023-52 IRB 1583, which, among other things, described the interaction of the DCL rules with the GloBE Model Rules and requested comments on such interaction. The notice also announced limited transition relief from the application of the DCL rules to the GloBE Model Rules for “legacy DCLs,” which generally are DCLs incurred before the effective date of the GloBE Model Rules.

On August 7, 2024, the Treasury Department and the IRS published proposed regulations (REG-105128-23) in the Federal Register (89 FR 64750), with a correction published in the Federal Register on September 3, 2024 (89 FR 71214) (the “2024 proposed regulations”). The 2024 proposed regulations included the DPL rules, which would require domestic corporations to include amounts related to

certain disregarded payments in income for U.S. tax purposes. Additionally, the 2024 proposed regulations would provide guidance on the interaction of the DCL rules and GloBE Model Rules and extend and broaden the transition relief announced in Notice 2023-80. In particular, the 2024 proposed regulations would provide that the DCL rules generally apply without taking into account QDMTTs or Top-up Taxes collected under an IIR or UTPR with respect to losses incurred in taxable years beginning before August 6, 2024. See proposed §1.1503(d)-8(b) (12). Finally, the 2024 proposed regulations included an anti-avoidance rule that would apply with respect to both DPLs and DCLs. See proposed §1.1503(d)-1(f).

On January 14, 2025, the Treasury Department and the IRS published TD 10026 in the Federal Register (90 FR 3003) (the “2025 final regulations”), which finalized the proposed DPL rules and the proposed anti-avoidance rule under §1.1503(d)-1(f). In response to comments on the 2024 proposed regulations, the 2025 final regulations also made two modifications to the rule under §1.1503(d)-3(c)(3) (referred to as the ”deemed ordering rule” in the 2025 final regulations), which applies for purposes of both the DCL and DPL rules. The first modification eliminated the restriction limiting the application of the rule to situations in which foreign law does not provide rules for determining which income is offset by the losses or deductions. The second modification provides that income or gain is taken into account only if it would be taken into account in determining income or a DCL and, therefore, income or gain otherwise disregarded for U.S. tax purposes is not taken into account. See §1.1503(d)-3(c)(3)(ii).

The DPL rules apply for taxable years beginning on or after January 1, 2026. The anti-avoidance rule in §1.1503(d)-1(f) applies to DCLs incurred in taxable years ending on or after August 6, 2024, and to DPLs in taxable years beginning on

1 Org. for Econ. Coop. & Dev. [OECD], Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two) (Dec. 14, 2021), https://www. oecd-ilibrary.org/taxation/tax-challenges-arising-from-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two_782bac33-en. As the context requires, references to the GloBE Model Rules include references to a foreign jurisdiction's legislation implementing the GloBE Model Rules. Capitalized terms used in this notice, but not defined herein, have the meanings ascribed to such terms under the GloBE Model Rules.

September 8, 2025 386 Bulletin No. 2025–37

or after January 1, 2026. The modifications to the deemed ordering rule apply to DCLs and DPLs incurred in taxable years beginning on or after January 1, 2026.

The 2025 final regulations did not include the proposed guidance on the interaction of the DCL rules and GloBE Model Rules, but the preamble to the 2025 final regulations announced that the DCL transition relief provided in the 2024 proposed regulations would be further extended, when finalized. See Additional Transition Relief With Respect to the GloBE Model Rules in TD 10026 (90 FR 3003, 3012-3014). Specifically, the transition relief set forth in the 2024 proposed regulations would be extended to apply with respect to DCLs incurred in taxable years beginning before August 31, 2025.