IRS Plans To Remove Disregarded Payment Loss Rules and Extend Dual Consolidated Loss Relief, What Multinationals Need To Know

The IRS has released Notice 2025-44, announcing two major regulatory reversals and a significant extension of transition relief for taxpayers subject to the dual consolidated loss (DCL) rules. This notice signals a dramatic shift in how Treasury intends to handle both disregarded payment loss (DPL) rules and certain recent amendments to the DCL framework.

For multinational groups, foreign branches, hybrid entities, and dual resident corporations, these changes could reduce compliance burdens, eliminate income inclusions that were widely viewed as inconsistent with the statute, and provide additional certainty under global minimum tax regimes such as the OECD Pillar Two GloBE Model Rules.

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Treasury Intends To Remove the Disregarded Payment Loss Rules

The 2025 final regulations introduced DPL rules requiring U.S. corporations to recognize income when making certain disregarded payments that generated deductions under foreign law. These rules were highly controversial. Taxpayers argued that:

• Section 1503(d) addresses only regarded items, not disregarded payments

• The rules conflicted with fundamental tax principles under section 7701

• Compliance burdens would be excessive for multinational structures

After reviewing comments, Treasury concluded that DPL rules created complexity without clear statutory authority. Treasury now plans to withdraw them entirely.

What this means:

• Corporate taxpayers will not have to track or recast disregarded payments into income inclusions

• The DCL rules will no longer require coordination with the DPL regulations

• Unwinding existing structures to avoid DPL exposure will no longer be necessary

Treasury will also add an exception to the anti avoidance rule under section 1.1503(d)-1(f) to prevent the rule from applying to structures that would have been affected by the now withdrawn DPL rules.

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Removal of Recent Modifications to the Deemed Ordering Rule

The 2025 final regulations also modified the deemed ordering rule under section 1.1503(d)-3(c)(3). These changes coordinated how DPLs and DCLs interacted and altered how income and losses were matched when applying the rules. Since DPL rules are being removed, the IRS states that these modifications are no longer needed.

Treasury will:

• Remove the 2025 changes to the deemed ordering rule

• Reevaluate the overall purpose, scope, and application of the rule

• Continue studying the treatment of disregarded items under the DCL regime

The upcoming proposed regulations will formally eliminate the revisions.

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Extension of Transition Relief for Interaction With GloBE Model Rules

One of the most significant elements of Notice 2025-44 is the extension of transition relief for taxpayers dealing with the interaction between U.S. DCL rules and the OECD Pillar Two global minimum tax (GloBE) rules.

Earlier guidance provided transition relief for:

• DCLs incurred before the effective date of GloBE rules

• DCLs incurred in taxable years beginning before August 31, 2025

Notice 2025-44 extends this relief even further.

New transition relief:

• DCLs incurred in taxable years beginning before January 1, 2028 will be covered

• Taxpayers do not need to consider QDMTTs, IIR top up taxes, or UTPR amounts in applying the U.S. DCL rules during this period

This gives multinational groups more certainty while the interaction of DCL and GloBE rules continues to develop at the OECD level.

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When Will the New Rules Apply

Treasury intends for the proposed regulations to apply as follows:

• Removal of the DPL rules will apply to taxable years beginning on or after January 1, 2026

• Removal of the deemed ordering rule revisions will apply to DCLs incurred in taxable years beginning on or after January 1, 2026

Until the proposed regulations are issued, taxpayers may rely on Notice 2025-44.

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IRS Requests Comments on Additional Changes

Treasury is also requesting comments on two additional issues:

1. Whether the all or nothing principle in the DCL rules should be modified

2. How disregarded items should be treated when computing DCLs, including possible approaches similar to the foreign branch category rules under section 904

Comments are due October 21, 2025, and can be submitted through Regulations.gov or by mail.

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How Margen Helps International Tax Teams Navigate DCL and GloBE Interactions

DCL rules, foreign branch tax systems, hybrid structures, and Pillar Two regimes create complex reporting and planning challenges. Margen helps tax professionals evaluate these issues by answering questions such as:

• "Will our dual resident corporation still need to track foreign use of losses after DPL rules are withdrawn?"

• "How does the extended transition relief apply to our GloBE top up tax calculations?"

• "Does our foreign branch or hybrid entity create potential DCL exposure under section 1503(d)?"

• "How should we analyze a potential triggering event during the certification period?"

• "What documentation is required to support reliance on Notice 2025-44?"

Margen will use the latest IRS guidance, including Notice 2025-44, to provide precise and reliable analysis that helps multinational groups stay compliant while navigating rapidly evolving cross border tax rules.

For full details, see IRS Notice 2025-44.