Proposed BEAT Regulations: Exception for Internal TLAC

When a non-US bank has a US corporate subsidiary it typically funds the subsidiary with debt. In computing its taxable income, the subsidiary is generally entitled to deduct the interest on the debt. Under US Federal Reserve Board rules, a foreign corporation that is a "global systemically important banking organization" or "GSIB," is required to use a certain amount of "total loss absorbing capital" or "TLAC" to fund its US "intermediate holding company" or "IHC." TLAC is long-term debt with characteristics specified by the Federal Reserve. The concept is that TLAC can be "bailed-in" in case of financial trouble to recapitalize the IHC. In Rev. Proc. 2017-12 the IRS said it would not challenge the treatment of such TLAC as debt for federal income tax purposes thus permitting an IHC to deduct interest on the TLAC. The TCJA, however, added the section 59A base erosion anti-abuse tax ("BEAT") to the Code. Pursuant to BEAT, in the case of certain large taxpayers, interest and other payments to a related non-US party ("base erosion payments") may be added back to determine the tax base for a 10% minimum tax. See Code section 59A. There has been a concern that interest payments on TLAC paid to a foreign corporate parent could be subject to add-back under BEAT.

The BEAT proposed regulations issued in December, however, provide that interest payments on TLAC required by the Federal Reserve are not considered "base erosion" payments for BEAT purposes. The rule would be effective as of January 1, 2018, the effective date of the BEAT.2

Accordingly, US IHCs will still be able to deduct interest on Federal Reserve required TLAC. This could obviate the need to significantly restructure their liabilities, for example, by repaying internal debt with obligations issued in the market.

Mutual Funds That Hold REIT Shares – Are the Fund Dividends Eligible for the 20% Code Section 199A Deduction?

 The TCJA allows an individual shareholder a 20% Code section 199A "qualified business income" deduction for dividends received from a real estate investment trust ("REIT"). When the statute was drafted, no specific provision was included for a mutual fund (i.e., a regulated investment company under Code section 851) that owns REIT shares to pass through the Code section 199A deduction to the mutual fund's individual shareholders. In some cases, mutual funds have only a fraction of their investments in REIT shares.

For example, there are currently 32 REITs in the S&P 500 index (and therefore in S&P 500 index funds). On the other hand, certain mutual funds invest all or almost all of their money in REIT shares. Since the TCJA was enacted there has been a concern that mutual funds are not able to pass through REIT dividends as such that would be eligible for the 20% deduction. However, on January 18, 2019, the IRS released a package of final regulations and additional proposed regulations under Code section 199A, clarifying this issue.3 The final regulations do not address the issue of whether RICs can pass through qualifying REIT dividends to their shareholders. However, the new set of proposed regulations specifically address this issue, providing that RICs may pass through Code section 199A dividends to non-corporate shareholders under certain circumstances. In general, shareholders of the RIC would have to meet the 45 day holding period for section 199A eligibility prescribed in the final section 199A regulations.4 A RIC would compute and report section 199A dividends based on the rules for capital gains in section 852(b)(3) and exempt-interest dividends in section 852(b)(5). The amount of a RIC's section 199A dividends for a taxable year would be limited to the excess of the RIC's qualified REIT dividends for the taxable year over expenses.

Proposed regulations state that this rule applies to taxable years ending after the date the proposed regulations are published as final, but that taxpayers can rely on the rules until that time.

During Q4 2018 there were other also favorable signs for the pass-through. Last fall, then chair of the House Ways and Means Committee Kevin Brady released the Tax Technical and Clerical Corrections Act, which included a provision that provides for pass-through of REIT dividends where the REIT shares are held by a mutual fund.5 The Joint Committee on Taxation explanation of the TCJA (also known as the "Blue Book") released in December also said the pass-through of Code section 199A dividends by RICs should be the right result.6

 The issue is of some import during tax reporting season. Generally speaking Form 1099 must be given to recipients by January 31, and presumably IRS felt a need to publish clarification as soon as possible, despite the government shutdown. Mutual funds will likely be comforted by the issuance of the proposed regulations in time for the January 31st deadline.

Proposed FATCA Regulations: Gross Proceeds Is Gone!

 On December 13, 2018, the IRS released proposed regulations amending regulations implementing legislation commonly known as the Foreign Account Tax Compliance Act (the "Proposed Regulations").7 The Proposed Regulations are significant for capital markets lawyers because they eliminate FATCA withholding on payments of gross proceeds, which affects most tax disclosures for debt and equity offerings. In addition, the Proposed Regulations further defer FATCA withholding on "foreign passthru payments." The Proposed Regulations also make a number of other changes to the FATCA regulations and related regulations.

Gross proceeds withholding eliminated. FATCA generally imposes a 30% withholding tax on "withholdable payments" made to certain foreign financial institutions ("FFI") and certain non-financial foreign entities. The Code defines "withholdable" payment to mean (a) any payment of interest (including any original issue discount), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, and other fixed or determinable annual or periodical gain, profits and income from US sources, and (b) any gross proceeds from the sale or other disposition of any property of a type which can produce interest or dividends. The IRS received comments when implementing FATCA that withholding on gross proceeds would require significant efforts by withholding agents. In 2016, the IRS released regulations that delayed FATCA withholding on gross proceeds until 2019. The preamble to the Proposed Regulations states that the IRS believe, in light of current compliance with FATCA by foreign governments and institutions, that withholding on payments of gross proceeds is no longer necessary to ensure cooperation with the implementation of FATCA. Accordingly, the Proposed Regulations withdraw FATCA withholding on gross proceeds. The Proposed Regulations state that withholding agents can rely on the Proposed Regulations until final regulations are issued.

Withholding for foreign passthru payments further deferred. Generally, an FFI that has an agreement with the IRS is required to withhold on any passthru payments made to its recalcitrant account holders and to FFIs that are not compliant with FATCA (non-participating FFIs). "Passthru payment" is generally defined as any withholdable payment or other payment to the extent attributable to a withholdable payment. In 2016, the IRS issued regulations delaying withholding on foreign passthru payments until the later of January 1, 2019 or the date of publication in the Federal Register of the final regulations definition of "foreign passthru payment." The Proposed Regulations further delay such withholding, stating that a participating FFI will not be required to withhold tax on a foreign passthru payment made to a recalcitrant account holder or nonparticipating FFI before the date that is two years after the date that final regulations which define the term "foreign passthru payment" are published in the Federal Register.

Other changes. In addition to eliminating gross proceeds withholding and deferring withholding on foreign passthru payments, the Proposed Regulations:

  • Eliminate FATCA withholding on non-cash value insurance premiums;
  • Clarify the definition of "Investment Entity" for purposes of FATCA;
  • Modify due diligence requirements for withholding agents; and
  • Make revisions related to credits and refunds of overwithheld tax.

To view the full article click here


 1 All section references herein refer to the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations thereunder.

2 In another helpful clarification, the proposed regulations also provide that payments to a US branch of a non-US taxpayer should not be treated as a base erosion payment under these rules. For a more detailed discussion of the proposed regulations, please see our article in Tax Notes titled "BEATen Up (Again): The IRS Issues Proposed BEAT Regulations" (January 7, 2019).

3 The final regulations are available at, and the proposed regulations are available at

4 45 days or less (taking into account the principles of section 246(c)(3) and (4)) during the 91-day period beginning on the date which is 45 days before the date on which the share becomes ex-dividend.

5 The provision would add a new sub-section (10) to Code section 852(b) permitting a RIC shareholder to take into account "...the amount reported by the company... as being attributable to qualified REIT dividends received by the company." The provision would also apply to "qualified publicly traded partnership income' which too is eligible for the 20% Code section 199A deduction. The provisions would be effective as though included in the TCJA.

6 The Blue Book has the following favorable language: "It is intended that in the case of an individual shareholder of a RIC that itself owns stock in a REIT or interests in a publicly traded partnership, the individual is treated as receiving qualified REIT dividends or qualified publicly traded partnership income to the extent any dividends received by the individual from the RIC are attributable to qualified REIT dividends or qualified publicly traded partnership income received by the RIC." Joint Committee on Taxation, General Explanation of Public Law 115-97 (December 2018), available at

7 The Proposed Regulations are available at

Visit us at

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2019. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.