Special reporting requirements for U.S. domestic use of U.K. dual consolidated loss.

AuthorFerris, Tara

A U.S. corporation that incurs a dual consolidated loss (DCL) generally is prohibited from using the loss to reduce U.S. taxable income. A DCL is a net operating loss, as determined under U.S. tax law, of a U.S. corporation that is also subject to an income tax in a foreign country on either a worldwide or a residence basis. The DCL rules in Sec. 1503(d) generally provide that a DCL of a dual-resident corporation, or a DCL of a separate unit of a U.S. corporation, may not be considered in the computation of taxable income of a U.S. corporation, a U.S. consolidated group, an unaffiliated U.S. dual resident corporation, or an unaffiliated U.S. domestic owner.

The U.S. regulations further prohibit a domestic corporation from using a DCL from a foreign country if the law of that foreign country also prohibits a domestic company from using a foreign loss. Regs. Sec. 1.1503(d)-3(e)(1) refers to such a prohibition under foreign law as "mirror legislation" because the U.S. rules also restrict a U.S. company from using a DCL incurred by the company. The U.S. regulations state that a foreign company is deemed to use a DCL if the domestic law of the foreign country in which the foreign company is organized denies any opportunity for the foreign company to use the foreign DCL in the year the loss was incurred.

However, in certain circumstances a U.S. corporation may use a DCL in calculating U.S. taxable income. The taxpayer should be aware that special rules apply if the DCL is subject to mirror legislation. Generally, a U.S. company may use a DCL in determining U.S. taxable income if the corporation:

* Attaches a DCL domestic use election statement to its original U.S. return for the loss year; and

* Certifies in a statement attached to the company's original U.S. returns filed for the subsequent five years that the DCL identified in the election statement has not been used, and will not be used, to offset income taxed in a foreign jurisdiction.

Failure to file a timely domestic use election statement and failure to file timely annual certifications are triggering events that require payment of the U.S. tax plus underpayment interest due to recapture of the DCL.

U.K. DCLs

If the DCL is from a loss incurred by a company organized under the laws of the United Kingdom, the U.S. company must comply with additional reporting requirements because of the U.K. mirror legislation. The U.K.'s Income and Corporation Taxes Act 1988 (ICTA) restricts a U.K. company...

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