IRS Reverses Course: Notice 2025-44 to Scrap Disregarded Payment Loss (DPL) Rules Amid Global Tax Shake-Up

The U.S. Treasury Department and the IRS have issued Notice 2025-44, a significant announcement for businesses with operations both in the U.S. and in other countries. This notice signals that the government is changing its mind on some recent tax rules, providing important guidance and relief for taxpayers.

1. Understanding the Dual Consolidated Loss (DCL) Rules 🧐

Before diving into the changes, it’s crucial to understand the fundamental concept behind the Dual Consolidated Loss (DCL) rules.

The Core Idea: Preventing the “Double Dip”

Think of a single business entity that, for tax purposes, exists in two places at once. This can happen because of how different countries define a company. For example, a U.S. company might have a branch in the UK, and the UK might treat that branch as its own separate entity for tax purposes.

If this entity has a tax loss (e.g., it spent more money than it earned), the DCL rules are designed to prevent it from using that same loss to reduce its taxes in both the U.S. and the foreign country. Using a single loss to lower your tax bill in two different places is what tax professionals call a “double dip” 🍦🍦. The DCL rules are there to block this.

Who is affected?

The DCL rules apply to a few specific situations where this “double tax presence” can occur:

• Dual Resident Corporations: These are U.S. corporations that are also considered tax residents in a foreign country. This often happens if a foreign country taxes a company based on where its management is located, even if it was incorporated in the U.S.
• Foreign Branches: A U.S. company might have an office or business operation in another country that is considered a “foreign branch.“
• Hybrid Entities: These are business entities that the U.S. and a foreign country see differently for tax purposes. For example, the U.S. might see it as just a division of a larger company, while the foreign country might see it as a separate corporation.

Example of a DCL Scenario

Imagine a U.S. corporation, “U.S. Co.,” has a subsidiary in Country X. U.S. Co. owns this subsidiary 100%. For U.S. tax purposes, U.S. Co. can choose to treat the subsidiary as a “disregarded entity” (like a simple branch), so its income and losses are just part of U.S. Co.’s tax return. However, for Country X’s tax purposes, the subsidiary is a separate legal company.

If this subsidiary in Country X has a $5 million loss in a year, and Country X has a tax law that allows it to share that loss with other affiliated companies in that country, the “double dip” is possible.

• Foreign Use: The subsidiary could use its $5 million loss to offset income from a different company in Country X, reducing taxes there.
• Domestic Use: The U.S. parent, U.S. Co., could also use that same $5 million loss to reduce its overall income on its U.S. tax return.

The DCL rules generally say you can’t do both. If the company wants to use the loss in the U.S., it has to certify to the IRS that it won’t be used in the foreign country. If it is used there—even by mistake—the DCL rules require the company to “recapture” that loss, meaning it has to add it back to its U.S. income and pay a penalty.

2. Proposed Removal of the DPL Rules 🛑

This is the biggest news from Notice 2025-44. The IRS is proposing to get rid of a new set of rules called the Disregarded Payment Loss (DPL) rules.

What were the DPL Rules? The DPL rules were finalized just recently, in January 2025. They were intended to address a different kind of “double dip” related to payments between different parts of the same company (for example, a loan payment from a foreign branch to its U.S. parent). While the U.S. would “disregard” this payment for tax purposes, the foreign country might treat it as a deductible expense. The DPL rules were designed to require the U.S. parent to include income on its tax return to counteract this foreign deduction.

Why are they being removed? Following their finalization, the IRS and Treasury received a lot of negative feedback. People said the rules were:

• Too Complex: They were incredibly difficult and costly for businesses to understand and comply with.
• Questionable Authority: Tax experts argued the IRS may not have had the legal authority under existing law to create these rules.

After considering this feedback, the government agrees that the DPL rules are too problematic and intends to remove them. This is a rare and significant reversal of a recently finalized rule.

3. Changes to the Deemed Ordering Rule and Anti-Avoidance Rule

Since the DPL rules are being scrapped, a few other related rules are also on the chopping block. The deemed ordering rule—which helps determine how a loss is used when foreign law is unclear—was recently updated to work with the DPL rules. Since that coordination is no longer needed, the IRS plans to remove those updates as well.

The IRS will also create an exception to a new anti-avoidance rule so that it doesn’t apply to the same situations the now-removed DPL rules were meant to address.

4. Extended Relief for GloBE Model Rules 🛡️

The DCL rules have been in a state of flux due to the new international Global Anti-Base Erosion (GloBE) Model Rules (also known as “Pillar Two”). This is a global effort to make sure large multinational companies pay a minimum tax rate of 15% in every country they operate in.

The issue is that a tax paid under these new GloBE rules might be considered a “foreign use” of a loss under the old DCL rules, triggering a recapture penalty.

To avoid this, the IRS is providing additional time for businesses to navigate this new global landscape. The notice extends the transition relief, meaning the DCL rules will generally not apply to these new global taxes for losses incurred in tax years beginning before January 1, 2028. This gives businesses more time and certainty while the IRS continues to study how these new global taxes interact with U.S. law.