Rule2025-23292
Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative Payments on Securities Lending Transactions
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 18, 2025
Effective
December 17, 2025
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains final regulations regarding the base erosion and anti-abuse tax imposed on certain large corporate taxpayers with respect to certain payments made to foreign related parties. The final regulations relate to how qualified derivative payments with respect to securities lending transactions are determined and reported. The final regulations affect corporations with substantial gross receipts that make payments to foreign related parties.
Full Text
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<title>Federal Register, Volume 90 Issue 241 (Thursday, December 18, 2025)</title>
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[Federal Register Volume 90, Number 241 (Thursday, December 18, 2025)]
[Rules and Regulations]
[Pages 59046-59051]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2025-23292]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 10041]
RIN 1545-BR20
Base Erosion and Anti-Abuse Tax Rules for Qualified Derivative
Payments on Securities Lending Transactions
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final rule.
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SUMMARY: This document contains final regulations regarding the base
erosion and anti-abuse tax imposed on certain large corporate taxpayers
with respect to certain payments made to foreign related parties. The
final regulations relate to how qualified derivative payments with
respect to securities lending transactions are determined and reported.
The final regulations affect corporations with substantial gross
receipts that make payments to foreign related parties.
DATES:
Effective date: The final regulations are effective December 17,
2025.
Applicability dates: For dates of applicability, see Sec. Sec.
1.59A-10 and 1.6038A-2(g).
FOR FURTHER INFORMATION CONTACT: Sheila Ramaswamy at (202) 317-6938
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Authority
This document contains additions and amendments to 26 CFR part 1
(Income Tax Regulations) under sections 59A and 6038A of the Internal
Revenue Code (Code) (``the final regulations''). The additions and
amendments are issued pursuant to the express delegations of authority
to the Secretary of the Treasury (or his delegate) provided under
sections 59A(i) and 6038A(b)(2). The final regulations are also issued
under the express delegation of authority under section 7805(a) of the
Code.
Background
This document contains final regulations under sections 59A and
[[Page 59047]]
6038A. The base erosion and anti-abuse tax (``BEAT'') of section 59A
imposes on each applicable taxpayer a tax equal to the base erosion
minimum tax amount for the taxable year, which is the excess of a
specified percentage of the modified taxable income of the applicable
taxpayer minus the applicable taxpayer's regular tax liability under
section 26(b) of the Code reduced (but not below zero) by certain
credits. See section 59A(b)(1) and (2).
The applicable taxpayer determines its modified taxable income by
computing its taxable income without regard to any base erosion tax
benefit with respect to any base erosion payment or the base erosion
percentage of any net operating loss deduction allowed under section
172 of the Code for the taxable year. See section 59A(c)(1). Generally,
a base erosion payment is any deductible amount paid or accrued by an
applicable taxpayer to a foreign person (as defined in section
6038A(c)(3)) that is a related party of the applicable taxpayer and the
base erosion tax benefit is the deduction allowed under Chapter 1 of
the Code for the taxable year for the base erosion payment. See section
59A(d)(1), (c)(2) and (f). Qualified derivative payments (``QDPs''), as
defined in section 59A(h)(2)(A), are not treated as base erosion
payments if they are properly reported to the IRS. See section
59A(h)(1) and (h)(2)(B).
On January 10, 2025, the Treasury Department and the IRS published
proposed regulations under sections 59A and 6038A (REG-107895-24) in
the Federal Register (90 FR 3085). The proposed regulations would
address how taxpayers determine and report qualified derivative payment
amounts with respect to securities lending transactions. Two comments
were submitted in response to the proposed regulations, but only one of
those comments addressed the proposed regulations. The Summary of
Comments and Explanation of Revisions section of this preamble
discusses this comment. All written comments received in response to
the proposed regulations are available at https:<a href="http://www.regulations.gov">www.regulations.gov</a> or
upon request. A public hearing on the proposed regulations was not held
because there were no requests to speak.
Summary of Comments and Explanation of Revisions
Proposed Sec. 1.59A-6(b)(3)(iii)(A) would provide that mark-to-
market gains and losses from the securities leg of an intercompany
securities lending transaction are not treated as QDPs. As proposed,
taxpayers would not be required to include those amounts in their QDP
reporting. A conforming amendment in proposed Sec. 1.59A-3(b)(2)(iv)
would provide that mark-to-market gains and losses from the securities
leg of a securities lending transaction are not taken into account when
determining the amount of a taxpayer's base erosion payment.
Proposed Sec. 1.59A-6(b)(3)(iv) would provide rules for
determining whether a taxpayer made a substitute payment or other
payment pursuant to a securities lending transaction to a foreign
related party. Specifically, the rule would provide that a taxpayer may
determine the amount of a substitute payment or other payment that it
has paid to a foreign related party by using the amount actually paid
by the taxpayer to the foreign related party if the taxpayer can
specifically identify each recipient of the substitute payment or other
payment. If the taxpayer cannot determine the recipient of those
payments, the rule would provide a method that treats the substitute
payments or other payments that a taxpayer pays with respect to
borrowed securities as having been paid first to foreign related
parties (but not in excess of the total amount of the payments received
by the foreign related parties from all payors).
The comment recommended that the final regulations provide
definitions for terms used in the regulations such as ``qualified
derivative payment,'' ``substitute payment,'' ``other amounts that
relate to the securities lending transaction,'' ``mark-to-market gains
and losses,'' ``securities leg of a securities lending transaction,''
and ``cash collateral'' to reduce ambiguity. The comment asserted that
the ambiguity could potentially lead to substitute payments being
misclassified as QDPs rather than base erosion payments. The comment
also requested additional examples illustrating the classification of
substitute payments.
In response to this comment, the final regulations include cross-
references to Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) to clarify the
meaning of the term ``substitute payment.''
Although proposed Sec. 1.59A-3(b)(2)(iv)(B) indicates by exclusion
that ``other amounts that relate to the securities lending
transaction'' refers to payments relating to the transaction other than
mark-to-market gains or losses and the delivery of securities to or
receipt of securities from the lender, greater clarity that substitute
payments and borrow fees are included in this term may be helpful.
Therefore, for consistency purposes, Sec. Sec. 1.59A-3(b)(2)(iv)(B)
and 1.59A-6(b)(3)(iii) of the final regulations have been modified to
use the term ``items of income, gain, loss, or deduction during the
taxable year'' and explain that this term refers to amounts such as
substitute payments and borrow fees that relate to the securities
lending transaction and does not include the delivery or receipt of
securities. The final regulations also clarify that the term ``mark-to-
market gains and losses'' with respect to a securities lending
transaction refers to the recognition of gain or loss on the
transaction as if the taxpayer's position in the securities lending
position were sold for its fair market value on the last business day
of the taxable year, as described in Sec. 1.59A-6(b)(1)(i).
Proposed Sec. 1.59A-6(b)(3)(iii) would provide cross-references to
Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) for the definition of a
``securities lending transaction.'' Sections 1.861-2(a)(7) and 1.861-
3(a)(6) define the term ``securities lending transaction'' as ``a
transfer of one or more securities that is described in section 1058(a)
or a substantially similar transaction.'' These cross-references were
intended to indicate that ``securities leg of a securities lending
transaction'' refers to the components of the transaction that relate
to the transfer of a security. The final regulations have been modified
to clarify that the securities leg of a securities lending transaction
refers to the rights, obligations, and transfers of securities and
payments under the transaction other than the obligation to provide or
right to receive cash collateral and interest (sometimes referred to as
rebate) thereon.
Some of the terms cited by the comment are already defined in other
parts of the regulations or are commonly understood industry terms. For
example, the term ``qualified derivative payment'' is defined in
section 59A(h)(2)(A) and Sec. 1.59A-6(b); therefore, no additional
definition is required. Additionally, ``cash collateral'' is a commonly
understood industry term that does not require a definition and is
already used in the existing regulations at Sec. 1.59A-
6(d)(2)(iii)(B).
The final regulations do not adopt the comment to include examples
illustrating the classification of substitute payments. The Treasury
Department and IRS are of the view that additional examples would not
add clarity because the final regulations now cross-reference
regulations illustrating the meaning of a substitute payment, and the
examples in proposed Sec. 1.59A-6(b)(3)(iii)(B) clearly indicate the
types of payments that are referenced by the term ``substitute
payment.''
The final regulations also make clarifying edits to the specific
[[Page 59048]]
identification method in proposed Sec. 1.59A-6(b)(3)(iv)(B). As noted
previously, the proposed regulations would have provided that a
taxpayer may determine the amount of substitute payments or other
payments with respect to the securities leg of a securities lending
transaction that it has paid to a foreign related party by using the
amount actually paid by the taxpayer to the foreign related party if
the taxpayer can specifically identify each recipient of the substitute
payment or other payment. This proposed rule was intended to be
available to a taxpayer only if the taxpayer is able to identify all of
the recipients of the substitute payments and other payments that
taxpayer made with respect to the securities leg of a securities
lending transaction during the taxable year. The final regulations
clarify this rule and expand the situations when a taxpayer may use the
specific identification method. Specifically, a taxpayer may use the
specific identification method of Sec. 1.59A-6(b)(3)(iv)(B) to
determine the amount of the substitute payments or other payments with
respect to the securities leg of a securities lending transaction that
it has paid to foreign related parties only if the taxpayer can
specifically identify all recipients of the substitute payments or
other payments paid by the taxpayer or the taxpayer can specifically
identify the payor for all substitute payments or other payments with
respect to the securities leg of a securities lending transaction
received by foreign related parties. If a taxpayer has paid any
substitute payment or other payment for which it cannot determine the
recipient and cannot specifically identify the payor for all substitute
payments received by foreign related parties, the final regulations
provide that the taxpayer must use the alternative method provided in
Sec. 1.59A-6(b)(3)(iv)(C).
The comment also recommended that the final regulations provide
additional clarifying examples illustrating mark-to-market adjustments
and the operation of the allocation method of proposed Sec. 1.59A-
6(b)(3)(iv). The Treasury Department and the IRS consider the examples
that were provided in proposed Sec. 1.59A-6(b)(3)(iii)(B) to be
sufficiently illustrative of the mechanics of mark-to-market
adjustments; therefore, the clarity of these rules will not be improved
by adding additional examples in the final regulations. The Treasury
Department and the IRS agree, however, that an example illustrating the
allocation method would be helpful. Therefore, the final regulations
include an example of the allocation method in Sec. 1.59A-
6(b)(3)(iv)(D).
Finally, the comment requested additional transition relief with
respect to the reporting requirements of Sec. 1.6038A-2(b)(7)(ix) such
as a two-year phased implementation. The comment suggested that in the
first phase, the IRS could adopt reduced reporting requirements or
grant safe harbor treatment for systems unable to capture detailed data
immediately to allow time for internal systems upgrades and process
testing before requiring full compliance. As an alternative, the
comment suggested permitting taxpayers to submit evidence of system
limitations as the basis for temporary relief, while establishing clear
compliance milestones. The final regulations do not adopt this comment.
Instead, the final regulations retain the transition relief provided in
the proposed regulations, which delays the applicability date of Sec.
1.6038A-2(b)(7)(ix). The rules relating to QDP reporting apply to
payments made in taxable years beginning on or after January 1, 2027.
It is expected that this delayed applicability date will give taxpayers
sufficient time to build and update the systems needed to track QDPs.
Applicability Date
The preamble to the proposed regulation explained that proposed
Sec. Sec. 1.59A-3(b)(2)(iv) (application of BEAT netting rule to
securities lending transactions) and 1.59A-6(b)(3)(ii) through (iv)
(QDP rules relating to securities lending transactions) would apply to
taxable years beginning on or after the date that final regulations are
filed with the Federal Register. The text of proposed Sec. 1.59A-
10(c), however, mistakenly provided that proposed Sec. Sec. 1.59A-
3(b)(2)(iv) and 1.59A-6(b)(3)(iii) and (iv) would apply to taxable
years beginning on or after January 10, 2025, which was the date that
the proposed regulations were filed with the Federal Register.
Consistent with the preamble to the proposed regulations, the final
regulations provide that Sec. Sec. 1.59A-3(b)(2)(iv) and 1.59A-
6(b)(3)(iii) and (iv) apply to taxable years beginning on or after
December 17, 2025. However, taxpayers may choose to apply these final
rules to a taxable year beginning on or after January 10, 2025, and
before December 17, 2025. Section 1.6038A-2(b)(7)(ix) (rules relating
to QDP reporting) applies to payments made in taxable years beginning
on or after January 1, 2027.
Special Analysis
I. Regulatory Planning and Review--Economic Analysis
These final regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget regarding review of tax regulations.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the
Office of Management and Budget (OMB) before collecting information
from the public, whether such collection of information is mandatory,
voluntary, or required to obtain or retain a benefit. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless it displays a valid control number
assigned by the Office of Management and Budget. These final
regulations do not create or impose any additional information
collection requirements in the form of reporting, recordkeeping
requirements, or third-party disclosure statements. The collection
requirements are within Form 8991 and its instructions which are
included in the OMB Control Number 1545-0123.
III. Regulatory Flexibility Act
Generally, the final regulations affect only aggregate groups of
corporations with average annual gross receipts of at least $500
million and that make payments to foreign related parties. Generally,
only large businesses have both substantial gross receipts and make
payments to foreign related parties. In accordance with the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.) the Secretary hereby certifies
that these final regulations will not have a significant economic
impact on a substantial number of small entities. Accordingly, a
regulatory flexibility analysis under the Regulatory Flexibility Act is
not required.
IV. Section 7805(f)
Pursuant to section 7805(f) of the Code, the notice of proposed
rulemaking was submitted to the Chief Counsel for Advocacy of the Small
Business Administration for comment on their impact on small business,
and no comments were received.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
[[Page 59049]]
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. The final regulations do not include any Federal mandate
that may result in expenditures by State, local, or Tribal governments,
or by the private sector in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. The final regulations do not have
federalism implications and do not impose substantial direct compliance
costs on State and local governments or preempt State law within the
meaning of the Executive order.
Drafting Information
The principal authors of these final regulations are D. Peter
Merkel and Sheila Ramaswamy of the Office of Associate Chief Counsel
(International). However, other personnel from the Treasury Department
and the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, the Treasury Department and IRS amend 26 CFR part 1 as
follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 1.59A-2 [Amended]
0
Par. 2. Section 1.59A-2 is amended by removing the language ``Sec.
1.59A-3(b)(2)(iii)'' from the last sentence of paragraph (e)(3)(vi) and
adding the language ``Sec. 1.59A-3(b)(2)(iv)'' in its place.
0
Par. 3. Section 1.59A-3 is amended by revising paragraph (b)(2)(iv) to
read as follows:
Sec. 1.59A-3 Base erosion payments and base erosion tax benefits.
* * * * *
(b) * * *
(2) * * *
(iv) Amounts paid or accrued with respect to mark-to-market
positions--(A) In general. For any transaction with respect to which
the taxpayer applies the mark-to-market method of accounting for U.S.
Federal income tax purposes, the rules set forth in Sec. 1.59A-
2(e)(3)(vi) apply to determine the amount of the base erosion payment.
(B) Application of the base erosion and anti-abuse tax (``BEAT'')
netting rule to securities lending transactions. Notwithstanding
paragraph (b)(2)(iv)(A) of this section, mark-to-market gains and
losses from the securities leg of a securities lending transaction as
defined in Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) are not taken
into account when applying Sec. 1.59A-2(e)(3)(vi) for purposes of
determining the amount of a taxpayer's base erosion payment. Mark-to
market gains and losses from the securities leg of a securities lending
transaction are the ordinary gains and losses that a taxpayer
recognizes with respect to the transaction by treating the taxpayer's
position in the transaction as having been sold for its fair market
value on the last business day of the taxable year (and any additional
times as required by the Internal Revenue Code or the taxpayer's method
of accounting). See Sec. 1.59A-6(b)(1)(i). When determining the amount
of the taxpayer's base erosion payment, items of income, gain, loss, or
deduction that relate to the securities leg of a securities lending
transaction, such as substitute payments defined in Sec. Sec. 1.861-
2(a)(7) and 1.861-3(a)(6) and borrow fees, must be taken into account
on a consistent basis that does not result in the duplication or
omission of these amounts. For purposes of the immediately preceding
sentence, the term items of income, gain, loss, or deduction that
relate to the securities leg of a securities lending transaction does
not include delivery of the securities to, or receipt of securities
from, the lender. This paragraph (b)(2)(iv)(B) applies to a taxpayer
that is either the borrower or lender with respect to the securities
lending transaction.
* * * * *
0
Par. 4. Section 1.59A-6 is amended by adding paragraphs (b)(3)(iii) and
(iv) to read as follows:
Sec. 1.59A-6 Qualified derivative payment.
* * * * *
(b) * * *
(3) * * *
(iii) Special rule for mark-to-market gains and losses on the
securities leg of a securities lending transaction--(A) In general. The
amount of any qualified derivative payment with respect to the
securities leg of a securities lending transaction as defined in
Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) that is excluded from the
denominator of the base erosion percentage is determined under Sec.
1.59A-3(b)(2)(iv)(B). The securities leg of a securities lending
transaction refers to the rights, obligations, and transfers of
securities and payments under the transaction other than the obligation
to provide or right to receive cash collateral and interest thereon.
Pursuant to Sec. 1.59A-3(b)(2)(iv)(B), mark-to-market gains and losses
on a securities leg of a securities lending transaction are not
included in determining the amount of the qualified derivative payment
with respect to that security. Thus, the amount of the qualified
derivative payment with respect to the securities leg of a securities
lending transaction is determined by taking into account only other
items of income, gain, loss, or deduction during the taxable year that
relate to the securities leg, such as substitute payments defined in
Sec. Sec. 1.861-2(a)(7) and 1.861-3(a)(6) and borrow fees. This
paragraph (b)(3)(iii)(A) applies to a taxpayer that is either the
borrower or lender with respect to the securities lending transaction.
(B) Examples. The following examples illustrate the application of
this paragraph (b)(3)(iii).
(1) Example 1: Securities loan--(i) Facts. FP is a foreign
corporation that owns all of the shares of DC, a domestic corporation.
FP is a foreign related party of DC under Sec. 1.59A-1(b)(12). DC is a
registered securities dealer. On September 1 of year 1, DC enters into
a securities lending transaction with FP in which it borrows stock from
FP. DC provides cash collateral for the loan and receives a rebate on
that collateral from FP. On September 1, year 1, the stock has a value
of $100x. On November 1, year 1, a dividend of $1x is paid by the
issuer on the stock. DC pays a substitute dividend of $1x to FP on
November 1, year 1 under the terms of the securities loan. There are no
other payments made or received in year 1. On December 31, year 1, the
stock has a value of $106x. DC is required to mark-to-market the
securities leg of the securities lending transaction for U.S. Federal
income tax purposes. DC is a calendar year taxpayer.
(ii) Analysis. DC has a deduction of $1x as a result of the
substitute dividend it pays to FP. Assuming that the securities lending
transaction otherwise
[[Page 59050]]
meets the requirements of this section (including reporting the
information required by Sec. 1.6038A-2(b)(7)(ix)), the amount of DC's
qualified derivative payment with respect to the securities lending
transaction is $1x. Payments with respect to the cash collateral are
not treated as part of the securities lending transaction. See
paragraph (d)(2)(iii)(B) of this section. With respect to the
securities leg of the securities lending transaction, DC has a mark-to-
market loss of ($6x). Under paragraph (b)(3)(iii)(A) of this section,
the amount of this mark-to-market loss is not included when determining
the amount of the qualified derivative payment. Under Sec. 1.59A-
3(b)(2)(iv)(B), DC's ($6x) mark-to-market loss on the securities leg of
the securities lending transaction also is not taken into account in
determining the base erosion tax benefit amount for purposes of the
numerator of the base erosion percentage. The ($6x) loss is taken into
account in the denominator of the base erosion percentage, while the
$1x substitute dividend payment is not taken into account for that
purpose because it is a qualified derivative payment. See Sec. 1.59A-
2(e)(3)(ii)(C) and (e)(3)(vi). The amount of the qualified derivative
payment would be the same if the lender paid a rebate on the cash
collateral in year 1, without regard to whether the parties agree to
pay and receive a net payment reflecting the difference between the
amount of the rebate and the amount of the substitute payment.
(2) Example 2: Securities loan. The facts are the same as in
paragraph (b)(3)(iii)(B)(1) of this section (Example 1) except that on
December 31, year 1, the stock has a value of $94x. With respect to the
securities leg of the securities lending transaction, DC has a mark-to-
market gain of $6x. Under paragraph (b)(3)(iii)(A) of this section, the
amount of this mark-to-market gain is not included when determining the
amount of the qualified derivative payment. DC has a deduction of $1x
as a result of the substitute dividend payment it makes to FP. Assuming
that the securities lending transaction otherwise meets the
requirements of this section (including reporting the information
required by Sec. 1.6038A-2(b)(7)(ix)), the amount of DC's qualified
derivative payment with respect to the securities lending transaction
is $1x. Neither the $6x gain nor the $1x substitute dividend payment,
which is a qualified derivative payment, are taken into account in the
denominator of the base erosion percentage.
(iv) Rule for determining the amount of a substitute payment or
other payment paid with respect to a securities lending transaction to
a foreign related party--(A) In general. When a taxpayer makes a
substitute payment as defined in Sec. 1.861-2(a)(7) or Sec. 1.861-
3(a)(6) or other payment with respect to the securities leg of a
securities lending transaction, the taxpayer must determine whether the
substitute payment or other payment is paid to a foreign related party.
The amount of the substitute payment or other payment paid by the
taxpayer to a foreign related party is determined under either
paragraph (b)(3)(iv)(B) or (C) of this section.
(B) Specific identification method. The taxpayer may determine the
amount of the substitute payments or other payments with respect to the
securities leg of a securities lending transaction that it has paid to
foreign related parties by using the amount actually paid by the
taxpayer to the foreign related parties if the taxpayer can
specifically identify all recipients of the substitute payments or
other payments paid by the taxpayer during the taxable year with
respect to the securities leg of a securities lending transaction or
the taxpayer can specifically identify the payor for all substitute
payments or other payments received by foreign related parties during
the taxable year with respect to the securities leg of a securities
lending transaction.
(C) Alternative method. If the taxpayer has paid any substitute
payment or other payment with respect to the securities leg of a
securities lending transaction to which the taxpayer cannot apply
paragraph (b)(3)(iv)(B) of this section, the taxpayer must use the
methodology provided in this paragraph (b)(3)(iv)(C).
(1) Step 1: Determining the total amount of substitute payments and
other payments received by foreign related parties. The taxpayer must
determine the total amount of substitute payments and other payments
with respect to the securities leg of a securities lending transaction
received by all foreign related parties of the taxpayer during the
taxable year.
(2) Step 2: Determining the total amount of substitute payments and
other payments paid by taxpayer. The taxpayer must determine the total
amount of substitute payments and other payments with respect to the
securities leg of a securities lending transaction paid by the taxpayer
during the taxable year.
(3) Step 3: Determining the amount of substitute payments and other
payments paid by the taxpayer to foreign related parties. The amount of
substitute payments and other payments with respect to the securities
leg of a securities lending transaction paid by the taxpayer is treated
as being paid first to foreign related parties of the taxpayer up to
the total amount of substitute payments and other payments with respect
to the securities leg of a securities lending transaction received by
foreign related parties. Any amount of substitute payments and other
payments with respect to the securities leg of a securities lending
transaction paid by the taxpayer that exceeds the amount of substitute
payments and other payments received by foreign related parties is
treated as paid to unrelated parties for purposes of this paragraph
(b)(3)(iv)(C)(3).
(D) Example--(1) Facts. FP is a foreign corporation that owns all
of the shares of DC, a domestic corporation, and all of the shares of
several foreign subsidiaries. FP and its foreign subsidiaries are
foreign related parties of DC under Sec. 1.59A-1(b)(12). DC is a
registered securities dealer. DC enters into securities lending
transactions pursuant to which it borrows securities both from foreign
affiliates that are members of the FP controlled group and from
unrelated customers. DC obtains the securities from a common pool of
available securities that includes securities from DC's U.S. customer
accounts as well as securities held by members of the FP controlled
group for their own account and for the account of customers. DC is
unable to determine from its records either the identities of the
counterparties from which DC has borrowed securities or whether it has
entered into a securities lending transaction with a foreign affiliate.
In year 1, DC makes substitute payments of $500x in aggregate with
respect to the securities lending transactions. DC's foreign affiliates
receive substitute payments in year 1 totaling $100x. Because DC cannot
determine whether it has entered into a securities lending transaction
with a foreign affiliate, DC does not know what portion of the $100x
received by DC's foreign affiliates was paid by DC.
(2) Analysis. Because DC is unable to determine the actual amount
of substitute payments it has paid to DC's foreign affiliates, DC
cannot use the specific identification method of paragraph
(b)(3)(iv)(B) of this section to determine the amount of substitute
payments it has paid to foreign related parties for QDP reporting
purposes. Instead, DC must use the alternative method set forth in
paragraph (b)(3)(iv)(C) of this section to determine the amount of
substitute payments treated as made to foreign related party
recipients. Under Step 1, DC determines that its foreign affiliates
have received
[[Page 59051]]
substitute payments of $100x. Under Step 2, DC determines that it has
paid substitute payments totaling $500x. Under Step 3, DC is treated as
having paid substitute payments to its foreign affiliates of $100x, up
to the total amount of substitute payments they received in year 1. The
remaining $400x of substitute payments paid by DC is treated as having
been paid to unrelated parties for purposes of paragraph
(b)(3)(iv)(C)(3) of this section.
* * * * *
0
Par. 5. Section 1.59A-10 is amended by revising paragraph (a) and
adding paragraph (c) to read as follows:
Sec. 1.59A-10 Applicability date.
(a) General applicability date. Sections 1.59A-1 through 1.59A-9,
other than the provisions described in the first sentence of paragraph
(b) of this section or in paragraph (c) of this section, apply to
taxable years ending on or after December 17, 2018. However, taxpayers
may apply the regulations in this paragraph (a) in their entirety for
taxable years beginning after December 31, 2017, and ending before
December 17, 2018. In lieu of applying the regulations referred to in
the first sentence of this paragraph (a), taxpayers may apply the
provisions matching Sec. Sec. 1.59A-1 through 1.59A-9 from the
Internal Revenue Bulletin (IRB) 2019-02 (https:<a href="http://www.irs.gov/irb2019-02_IRB">www.irs.gov/irb2019-02_IRB</a>) in their entirety for all taxable years beginning after
December 31, 2017, and ending on or before December 6, 2019.
* * * * *
(c) Additional applicability dates for certain rules relating to
securities lending transactions. Sections 1.59A-3(b)(2)(iv) and 1.59A-
6(b)(3)(iii) and (iv) apply to taxable years beginning on or after
December 17, 2025.
0
Par. 6. Section 1.6038A-2 is amended by revising the third sentence of
paragraph (g) to read as follows:
Sec. 1.6038A-2 Requirement of return.
* * * * *
(g) * * * Paragraph (b)(7)(ix) of this section applies to payments
made in taxable years beginning on or after January 1, 2027. * * *
Frank J. Bisignano,
Chief Executive Officer.
Approved: October 30, 2025.
Kenneth J. Kies,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2025-23292 Filed 12-17-25; 8:45 am]
BILLING CODE 4831-GV-P
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</html>Indexed from Federal Register on December 18, 2025.
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