Foreign Branch Separate Unit Explained
P is a domestic corporation that carries on business operations in Country X constituting a permanent establishment under the U.S.–Country X income tax convention. In year 1, a loss is attributable to P’s Country X permanent establishment, as determined under § 1.1503(d)-5.
Under §§ 1.1503(d)-1(b)(4)(i)(A) and 1.367(a)-6T(g)(1), P’s Country X permanent establishment constitutes a foreign branch separate unit. The year 1 loss attributable to that separate unit is therefore a dual consolidated loss under § 1.1503(d)-1(b)(5)(ii). The DCL rules apply even though there is no affiliate of the foreign branch separate unit in Country X, because a portion of the loss could still be put to a foreign use. Unless an exception (such as a domestic use election) applies, the loss is subject to the domestic use limitation of § 1.1503(d)-4(b) and cannot offset income of P that is not attributable to the Country X foreign branch separate unit.
Under the alternate facts, P’s Country X activities are a foreign branch under § 1.367(a)-6T(g)(1) but do not rise to a permanent establishment. The exception in § 1.1503(d)-1(b)(4)(iii) then applies, so the activities do not constitute a foreign branch separate unit and the year 1 loss is not a DCL. Had P instead operated through a hybrid entity (DE1x), the exception would not apply and the loss would again be a dual consolidated loss.
