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Project Financing and Funding of Nuclear Power in the US

The past several decades have seen minimal greenfield nuclear plant development in the U.S. Units 3 and 4 of the Vogtle power plant in Greensboro, Ga., came online in 2023 and 2024, respectively, representing the first new projects in nearly a decade. Since 1990, the only other project placed in service was Watts Bar Unit 2 outside Knoxville, Tenn., which is owned and operated by the Tennessee Valley Authority (TVA). Financing is one of the principal challenges that needs to be overcome for nuclear energy to realize its full promise and potential.

Chart of U.S. Nuclear Electricity Generation Capacity and Generation from 1957 to 2022

Financing Traditional Nuclear Projects: Cash (Flow) Is King

Non-recourse or limited-recourse financing for nuclear energy projects has been difficult to obtain. Traditionally developed nuclear generating assets are among the most expensive infrastructure projects. Typically in the range of approximately 1 gigawatt (GW) per unit, they are principally characterized by their technical and regulatory complexity.

Long and often-delayed permitting and construction lead to cost overruns, creating a highly unpredictable cash flow that may not be realized for 20+ years. Given the scale and capital investments involved in developing and constructing nuclear power plants, as well as the lack of greenfield development in the U.S. over the past three decades, there are few (if any) engineering and construction firms currently able to deliver projects on a lump-sum, turnkey basis.

A further complication to attracting private sector financing arises from the deregulated structure of power markets in many regions across the U.S. Debt financiers will typically look to predictability of future cashflows as a primary measure of assessing risk with any power project. For nuclear facilities in liberalized wholesale markets, this will often be difficult due to energy price fluctuations and the frequent absence of dedicated offtake terms.

Although nuclear power plants can participate in forward capacity auctions, these are generally conducted three years in advance with a limited capacity commitment period. Due to the aforementioned construction timelines, nuclear project developers are rarely in a position to bid on future capacity auctions prior to the commencement of construction.

The nature of funding required to build large-scale traditional nuclear plants severely limits – if not precludes – private investment . Governmental support has been provided in a number of different contexts. The Inflation Reduction Act (IRA) introduced a new zero-emissions nuclear production tax credit, which provided a credit of up to 1.5 cents (inflation adjusted) for projects that meet prevailing wage requirements.¹ Further, the IRA’s transferability sections have allowed project sponsors the ability to unlock greater revenue streams.² In addition to the tax credits, the IRA allocated $700 million in funding for the development of high-assay low-enriched uranium (HALEU), while the Infrastructure Investment and Jobs Act (IIJA) allocated funding for the development of modular and advanced nuclear reactors. A more direct form of project-level governmental support comes in the form of direct lending or loan guarantees. For instance, the development of Vogtle Units 3 and 4 received a $12 billion loan guarantee from the Department of Energy.

Permitting Reform Can Help

Ultimately, a stable and favorable regulatory regime would lower the discount rate and hence the required rate of return for nuclear power projects. The Trump administration has signaled its intention to promote the nuclear industry through a number of early executive actions, though legislation would likely be needed to create meaningful changes in this regard.

Notwithstanding this apparent support for nuclear energy, federal agencies have been ordered to pause the disbursement of funds appropriated under the IRA and the IIJA for at least 90 days, creating some uncertainty as to the status of funding for nuclear energy projects (as well as a broad range of clean energy projects) appropriated thereunder. Permitting reform and further funding to encourage greater development of nuclear projects receives strong bipartisan support, but is subject to delays if made part of a larger political compromise.

Permitting reform and further funding to encourage greater development of nuclear projects receives strong bipartisan support, but is subject to delays if made part of a larger political compromise.

Small Modular Reactors, Lower Hurdles to Financing and Deployment

In order to sidestep some of the technical challenges that have traditionally resulted in delays and cost-overruns, the nuclear industry has moved towards the adoption of small modular reactors (SMRs) as a means to lower delivery costs, and in turn, reduce financing hurdles. Based on the International Atomic Energy Agency’s definition, SMRs include units of up to 300 megawatts (MW) of generating capacity. There are numerous technologies currently competing under the umbrella SMR classification, but in general, these technologies allow generating assets to be largely fabricated off-site on a standardized basis, potentially reducing manufacturing costs and regulatory uncertainties, and hastening deployment of new technologies.

SMR financing is rapidly evolving. Since there are currently no operational SMR projects in the U.S., the first generation of projects to come online will require “first-of-a-kind” (FOAK) financing. This can be challenging for a number of reasons, as it will require financiers to accept the elevated risks associated with a commercially unproven technology. Government can and does derisk initial equity financing through loan guarantees and/or grants. In fact, we saw evidence of such this in 2021’s Bipartisan Infrastructure Law, in which the US Department of Energy announced $900 million in funding to support SMR deployment. Earlier this month, the TVA and American Electric Power (AEP) led an $800 million application with partners including Bechtel, BWX Technologies, Duke Energy to pursue advanced reactor projects. The substance of the proposals is to add SMRs at existing generating sites including TVA’s Clinch River site and Indiana Michigan Power’s Spencer County site. It is unclear if the Trump Administration’s funding freezes and priority changes will jeopardize disbursements from this legislation, but general support for the nuclear industry appears to continue.

Since there are currently no operational SMR projects in the U.S., the first generation of projects to come online will require “first-of-a-kind” (FOAK) financing.

Even without governmental support, innovative financing structures will be available to assist in the deployment of SMR projects. A number of companies developing SMR designs are doing so together with corporate customers that plan to deploy these reactors as sole-source providers for facilities such as AI data centers. With a dedicated power purchase agreement with a creditworthy offtaker, many SMR projects will be considered bankable notwithstanding the novelty of the technology being deployed.

Conclusion

Although nuclear energy is widely seen as playing a key role in grid expansion and decarbonization initiatives, there are a number of obstacles which render financing challenging. Strong political support alongside appropriately tailored policy tools can help unlock the private capital needed to deploy nuclear energy at scale. The arrival of SMR technology will produce initial challenges with FOAK financing, but in time more predictable returns will attract the financing to permit a more widescale adoption of nuclear energy in countless use cases.

Knowledgeable and experienced legal counsel can assist with the proper structuring and risk allocation in transaction documents to help unlock financing and drive projects forward. Given the enthusiasm for the role of nuclear in supporting energy expansion, however, there is room for optimism about the opportunities for greenfield nuclear projects in the coming decades.

¹ 26 U.S.C. § 45U.
² 26 U.S.C. § 6417.

Fifth Circuit Court of Appeals Vacates Its Own Stay Rendering the Corporate Transparency Act Unenforceable . . . Again

On December 26, 2024, in Texas Top Cop Shop, Inc. v. Garland, No. 24-40792, 2024 WL 5224138 (5th Cir. Dec. 26, 2024), a merits panel of the United States Court of Appeals for the Fifth Circuit issued an order vacating the Court’s own stay of the preliminary injunction enjoining enforcement of the Corporate Transparency Act (“CTA”), that was originally entered by the United States District Court for the Eastern District of Texas on December 3, 2024, No. 4:24-CV-478, 2024 WL 5049220 (E.D. Tex. Dec 5, 2024).

A Timeline of Events:

December 3, 2024 – The District Court orders a nationwide preliminary injunction on enforcement of the CTA.
December 5, 2024 – The Government appeals the District Court’s ruling to the Fifth Circuit.
December 6, 2024 – The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) issues a statement making filing of beneficial ownership information reports (“BOIRs”) voluntary.
December 23, 2024 – A motions panel of the Fifth Circuit grants the Government’s emergency motion for a stay pending appeal and FinCEN issues a statement requiring filing of BOIRs again with extended deadlines.
December 26, 2024 – A merits panel of the Fifth Circuit vacates its own stay, thereby enjoining enforcement of the CTA.
December 27, 2024 – FinCEN issues a statement again making filing of BOIRs voluntary.
December 31, 2024 – FinCEN files an application for a stay of the December 3, 2024 injunction with the Supreme Court of the United States.

This most recent order from the Fifth Circuit has effectively paused the requirement to file BOIRs under the CTA once again. In its most recent statement, FinCEN confirmed that “[i]n light of a recent federal court order, reporting companies are not currently required to file beneficial ownership information with FinCEN and are not subject to liability if they fail to do so while the order remains in force. However, reporting companies may continue to voluntarily submit beneficial ownership information reports.”

Although reporting requirements are not currently being enforced, we note that this litigation is ongoing, and if the Supreme Court decides to grant FinCEN’s December 31, 2024 application, reporting companies could once again be required to file. Given the high degree of unpredictability, reporting companies and others affected by the CTA should continue to monitor the situation closely and be prepared to file BOIRs with FinCEN in the event that enforcement is again resumed. If enforcement is resumed, the current reporting deadline for most reporting companies will be January 13, 2025, and while FinCEN may again adjust deadlines, this outcome is not assured.

For more information on the CTA and reporting requirements generally, please reference the linked Client Alert, dated November 24, 2024.

Client Alert Update: Developments in the Corporate Transparency Act Injunction

As we previously reported, a nationwide preliminary injunction against enforcement of the Corporate Transparency Act (CTA) was issued on December 3, 2024. Since our last update, there have been significant developments:

Fifth Circuit Stay and Revival of CTA Enforcement: On December 23, 2024, a three-judge panel of the United States Court of Appeals for the Fifth Circuit stayed the lower court’s preliminary injunction, temporarily reviving the immediate enforceability of the CTA.
Extension of Filing Deadline: Following the Fifth Circuit’s stay, FinCEN announced an extension of the filing deadline for Beneficial Ownership Information Reports (BOIRs) to January 13, 2025, applicable to entities formed before January 1, 2024.
Injunction Reinstated: On December 26, 2024, the Fifth Circuit vacated the three-judge panel’s decision to stay the preliminary injunction. As a result, enforcement of the CTA is once again enjoined, and reporting companies are not currently required to file BOIRs with FinCEN.

Litigation challenging the CTA continues, and further developments are likely as the legal landscape evolves. At this time, we reaffirm our prior guidance:

Reporting companies are not currently required to file BOIRs while the injunction remains in effect and will not face penalties for failing to do so.
FinCEN continues to accept voluntary submissions for entities that wish to proactively comply with potential future obligations.

Businesses that have already begun preparing beneficial ownership information may wish to complete the process to ensure readiness if the injunction is lifted. We will continue to provide updates on this matter.

Federal Appeals Court Reinstates Injunction Against the CTA, Pending Appeal

At approximately 8:15 p.m. Eastern Time on December 26, 2024, the United States Court of Appeals for the Fifth Circuit (Fifth Circuit) reversed course from its prior ruling in Texas Top Cop Shop, Inc., v. Garland to allow a lower court’s nationwide preliminary injunction stand against the Corporate Transparency Act (CTA), pending the Government’s appeal. This means that, once again, the Government, including the United States Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), is barred from enforcing any aspect of the CTA’s disclosure requirements against reporting companies, including those formed before January 1, 2024. This decision prevents FinCEN from enforcing its recently announced deadline extension that would have deferred the compliance deadline for such existing entities from January 1, 2025, to January 13, 2025.

This abrupt about-face appears to be the result of a reassignment of Texas Top Cop Shop, Inc., v. Garland from one three-judge panel of the Fifth Circuit to another. The Fifth Circuit’s prior decision was issued by a “motions panel,” which decided only the Government’s motion to stay the lower court’s injunction. The motions panel also ordered that the case be expedited and assigned to the next available “merits panel” of the Fifth Circuit, which would be charged with deciding the merits of the Government’s appeal. Once the case was assigned to the merits panel, however, the judges on that panel (whose identities have not yet been publicized) appear to have disagreed with their colleagues. The new panel vacated the motions panel’s stay “in order to preserve the constitutional status quo while the merits panel considers the parties’ weighty substantive arguments.” The Government must now decide whether to seek relief from the United States Supreme Court, which may ultimately determine the fate of the CTA.

Tax and Disclosure Considerations Related to Executive Security Benefits

Key Takeaways

Executives and companies may deduct the cost of security benefits that meet certain requirements under the Treasury Regulations
Public companies are generally required to disclose the cost of security benefits they provide to their executive teams in certain filings with the Securities and Exchange Commission

As individual executives are attracting increased attention for their roles in high-profile consumer-facing companies, their employers are establishing or expanding executive security programs. An executive security program allows key employees to focus on the business and protects shareholder value from stock price fluctuations associated with a security incident. All employers establishing an executive security program should be familiar with the tax consequences of these benefits for both the employer and the executive and public company employers should be aware of the related rules for disclosure of executive perquisites in their proxy statements.

Certain security benefits may be deductible by the employee and employer

Generally, any benefit provided to an employee is includible in taxable income. Certain fringe benefits, including “working condition fringes,” are excludible from income if properly structured. Employer-provided transportation may be excluded from income if it addresses a bona fide business-oriented security concern and the employer establishes an overall security program with respect to the relevant executive. An “overall security program” is a comprehensive program that provides 24-hour security to the executive subject to the following rules:

The executive must be protected while traveling for business or personal purposes; and
The program must include the provision of:
- A bodyguard or chauffeur trained in evasive driving techniques;
- An automobile with security equipment installed;
- Guards, metal detectors, alarms or similar methods of controlling access to the executive’s workplace and residence; and
- Flights on the employer’s aircraft for business and personal reasons, where appropriate.

Employers may find that such an exhaustive security program is unnecessary for their needs. In this situation, the Treasury Regulations also provide that the employer may engage an independent security consultant to perform a security study. If the study demonstrates that the default 24-hour security program is not required to address the employer’s security concerns, the cost of a less comprehensive transportation security program may still be deductible from the employee’s income.

These tax benefits may also extend to the executive’s spouse and dependents. If there is a bona fide business-oriented security concern with respect to an executive, that concern also extends to the executive’s spouse and dependents. The cost of transporting the executive’s spouse and dependents in the same vehicle or aircraft at the same time as the executive remains deductible as a working condition fringe. Deductions for personal travel are limited, however, to the excess of the transportation cost with additional security measures over the transportation cost absent the security concern. For example, if an executive purchases an automobile with bulletproof glass, the executive may only deduct the difference between the cost of the vehicle with and without bulletproof glass.

Despite the elimination of the general commuter expense deduction for employers under the Tax Cuts and Jobs Act, employers may still deduct the cost of providing transportation between the executive’s residence and place of employment if the cost is necessary to ensure the safety of the executive. The standard for a transportation security expense to be deductible by the employer is much lower than the standard that the expense must meet to be excludible from the employee’s income. Transportation expenses are deductible by the company if a reasonable person would consider it unsafe for the employee to commute during the applicable time of day.

Executive security benefits are considered perquisites that must be disclosed with other executive compensation

Under Item 402 of Regulation S-K, companies must disclose executive perquisites with an aggregate value over $10,000 in their proxy statements. The SEC has stated that an item is not a perquisite if it is integrally and directly related to the performance of an executive’s duties. A benefit that is not integrally and directly related to the performance of an executive’s duties is then considered a perquisite if it confers a personal benefit regardless of whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees. The SEC has specifically listed “personal travel using vehicles owned or leased by the company” and “security provided at a personal residence or during personal travel” as benefits that constitute perquisites and has brought enforcement actions against companies and executives for failure to disclose or properly value these benefits in recent years. Companies that provide security benefits often take the position that these benefits are integrally and directly related to the performance of the executive’s duties but disclose the value of the benefits in an abundance of caution.

Institutional Shareholder Services (ISS) also scrutinizes executive perquisite disclosures. Listed among ISS’ examples of problematic pay practices that could cause ISS to recommend a vote against an executive pay package are “excessive or extraordinary perquisites,” which include personal use of corporate aircraft and any associated tax gross-ups. Filers must carefully draft their disclosures to explain that these security programs are necessary for the business.

CFPB Takes Aim at Data Brokers in Proposed Rule Amending FCRA

On December 3, the CFPB announced a proposed rule to enhance oversight of data brokers that handle consumers’ sensitive personal and financial information. The proposed rule would amend Regulation V, which implements the Fair Credit Reporting Act (FCRA), to require data brokers to comply with credit bureau-style regulations under FCRA if they sell income data or certain other financial information on consumers, regardless of its end use.

Should this rule be finalized, the CFPB would be empowered to enforce the FCRA’s privacy protections and consumer safeguards in connection with data brokers who leverage emerging technologies that became prevalent after FCRA’s enactment.

What are some of the implications of the new rule?

Data Brokers are Now Considered CRAs. The proposed rule defines the circumstances under which companies handling consumer data would be considered CRAs by clarifying the definition of “consumer reports.” The rule specifies that data brokers selling any of four types of consumer information—credit history, credit score, debt payments, or income/financial tier data—would generally be considered to be selling a consumer report.
Assembling Information About Consumers Means You are a CRA. Under the rule, an entity is a CRA if it assembles or evaluates information about consumers, including by collecting, gathering, or retaining; assessing, verifying, validating; or contributing to or altering the content of such information. This view is in step with the Bureau’s recent Circular on AI-based background dossiers of employees. (See our prior discussion here.)
Header Information is Now a Consumer Report. Under the proposed rule, communications from consumer reporting agencies of certain personal identifiers that they collect—such as name, addresses, date of birth, Social Security numbers, and phone numbers—would be consumer reports. This would mean that consumer reporting agencies could only sell such information (typically referred to as “credit header” data) if the user had a permissible purpose under the FCRA.
Marketing is Not a Legitimate Business Need. The proposed rule emphasizes that marketing is not a “legitimate business need” under the FCRA. Accordingly, CRAs could not use consumer reports to decide for an advertiser which consumers should receive ads and would not be able to send ads to consumers on an advertiser’s behalf.
Enhanced Disclosure and Consent Requirements. Under the FCRA, consumers can give their consent to share data. Under the proposed rule, the Bureau clarified that consumers must be provided a clear and conspicuous disclosure stating how their consumer report will be used. It would also require data brokers to acknowledge a consumer’s right to revoke their consent. Finally, the proposed rule requires a new and separate consumer authorization for each product or service authorized by the consumer. The Bureau is focused on instances where a customer signs up for a specific product or service, such as credit monitoring, but then receives targeted marketing for a completely different product.

Comments on the rule must be received on or before March 3, 2025.

Putting It Into Practice: With the release of the rule so close to the end of Director Chopra’s term, it will be interesting to see what a new administration does with it. We expect a new CFPB director to scale back and rescind much of the informal regulatory guidance that was issued by the Biden administration. However, some aspects of the data broker rule have bipartisan support so we may see parts of it finalized in 2025.

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Proposed Disregarded Payment Loss Rules Create Traps for the Unwary

Be wary: The US Department of the Treasury’s proposed disregarded payment loss (DPL) regulations lay surprising new traps for multinational taxpayers – and those ensnared are unlikely to see what’s coming.

Under the proposed regulations, disregarded payments from a foreign disregarded entity to its domestic corporate parent can give rise to a US income inclusion without any offsetting deduction.[1] This phantom income can be substantial and because the inclusion results from payments that are disregarded as a matter of US tax law, it is sure to be an unwelcome surprise for some taxpayers.

Multinational taxpayers with US corporate entities that hold or acquire interests in foreign disregarded entities should understand the proposed regulations, determine their potential exposure, and consider steps to mitigate potential tax liabilities. This article provides a high-level overview of the proposed regulations and reviews the questions that multinational companies should ask themselves before the traps are sprung.

In Depth

The DPL rules are included in proposed regulations that were published on August 7, 2024.[2] The proposed regulations address, among other topics, how the Section 1503(d) dual consolidated loss (DCL) rules apply in the context of Pillar Two taxes. Though the proposed regulations include both DCL and DPL rules and the DPL rules use similar timing and concepts as the DCL rules, the DPL rules operate separately and apply to a different set of circumstances.[3]

While the DCL rules prevent taxpayers from deducting the same loss twice (once in the United States and once in a foreign jurisdiction), the DPL rules target “deduction/no inclusion” (D/NI) outcomes. In a D/NI scenario, a domestic corporation owns a foreign disregarded entity that makes payments to its domestic corporate parent. The payments are regarded for foreign tax purposes and may give rise to a foreign deduction or loss but are disregarded for US tax purposes, so there is no corresponding US income inclusion. Under foreign tax law, the foreign deduction or loss can be used to offset other foreign income and reduce foreign tax.[4]

To prevent D/NI outcomes, the proposed DPL rules identify certain foreign tax losses attributable to disregarded payments and then require the domestic corporate parent to include a corresponding amount of income for US tax purposes. However, the rules are extremely broad and may require US income inclusions where there is no D/NI outcome or potentially when the foreign disregarded entity is not actually in a loss position from a foreign tax perspective.[5]

As explained below, the rules (1) apply only to domestic corporations that are deemed to consent to their application, (2) may require domestic corporations to include a substantial “DPL inclusion amount” as ordinary income with no offsetting deduction, and (3) will require such inclusion whenever one of two triggering events occur, namely, a “foreign use” of the DPL or a failure to satisfy the rules’ certification requirements.

DEEMED CONSENT

The DPL rules apply only to consenting domestic corporations but set a low bar for what this “consent” requires. Essentially, a domestic corporation consents to the rules if it owns a foreign disregarded entity, with the applicability date depending on when the domestic corporation acquired or checked the box on the foreign disregarded entity.

First, a domestic corporation consents to the DPL rules if it directly or indirectly owns interests in a “specified eligible entity”[6] that makes a check-the-box election on or after August 6, 2024, to be a disregarded entity.[7]

Second, a domestic corporate owner is deemed to consent to the DPL rules if, as of August 6, 2025, the entity directly or indirectly owns interests in a disregarded entity and has not otherwise consented to the rules. To avoid such deemed consent with respect to a disregarded entity, the disregarded entity may instead elect to be treated as a corporation prior to August 6, 2025. Of course, the related consequences of such an election can be significant.[8]

THE DPL INCLUSION AMOUNT

Domestic corporations that consent to the rules may be required to include a DPL inclusion amount as income. For a specified eligible entity or foreign branch of a consenting domestic corporation (such specified eligible entity or foreign branch is referred to as a “disregarded payment entity”), the DPL for a given tax year is the disregarded payment entity’s net loss for foreign tax purposes that is composed of certain items of income and deduction that are disregarded for US tax purposes.[9] The notice of proposed rulemaking (NPRM) provides the following example:

[I]f for a foreign taxable year a disregarded payment entity’s only items are a $100x interest deduction and $70x of royalty income, and if each item were disregarded for U.S. tax purposes as a payment between a disregarded entity and its tax owner (but taken into account under foreign law), then the entity would have a $30x disregarded payment loss for the taxable year.

The DPL inclusion amount is the DPL amount reduced by the positive balance of the “DPL cumulative register.” The DPL cumulative register reflects the cumulative amount of disregarded payment income attributable to the disregarded payment entity across multiple years. The NPRM also provides the following example:

[I]f a disregarded payment entity incurs a $100x disregarded payment loss in year 1 and has $80x of disregarded payment income in year 2, only $20x of the disregarded payment loss is likely available under the foreign tax law to be put to a foreign use. As such, if a triggering event occurs at the end of year 2, then the specified domestic owner must include in gross income $20x (rather than the entire $100x of the disregarded payment loss).

Taxpayers who expect to benefit from the DPL cumulative register should keep in mind that the register only reflects disregarded payments that would be interest, royalties, or structured payments if regarded for US tax purposes. It reflects no other disregarded payments, and it reflects no regarded payments of any sort.

Notably, disregarded payment entities “for which the relevant foreign tax law is the same” are generally combined and treated as a single disregarded payment entity for purposes of the DPL rules. As a result, disregarded payments between entities formed in the same foreign jurisdiction generally should not give rise to DPL inclusions. However, this rule applies only where the entities have the same foreign tax year and are owned by the same consenting domestic corporation or by consenting domestic corporations that are members of the same consolidated group. Further, to ensure the items of foreign income and deduction net against one another within the combined disregarded payment entity, taxpayers should analyze the applicable foreign tax rules to confirm that these items accrue in the same foreign taxable year.

THE TRIGGERING EVENTS

Consenting domestic corporations will be forced to include the DPL inclusion amount as ordinary income if one of two triggering events occurs within a certification period. A certification period includes the foreign tax year in which the DPL is incurred, any prior foreign tax year, and the subsequent 60-month period. These certification periods and triggering events are somewhat similar to the ones used in the DCL rules. In the case of the DPL rules, however, there is no ability to make a domestic use election, as for US tax purposes there is no regarded loss that can be used to offset US tax.

The first triggering event is a “foreign use” of the DPL. A foreign use is determined under the principles of the DCL rules. Thus, a foreign use generally occurs when any portion of a deduction taken into account in computing the DPL is made available to offset or reduce income under foreign tax law that is considered under US tax law to be income of a related foreign corporation (and certain other entities in limited circumstances).

The second triggering event occurs if the domestic corporation fails to comply with certification requirements. Specifically, where a consenting domestic corporation’s disregarded entity has incurred a DPL, the domestic corporation must certify annually throughout the certification period that no foreign use of the DPL has occurred.

HYBRID MISMATCH RULES AND PILLAR TWO

The DPL rules provide that if a relevant foreign tax law denies a deduction for an item to prevent a D/NI outcome, the item is not taken into account for purposes of computing DPL or disregarded payment income. These so-called “hybrid mismatch rules” go some way toward softening the headache the DPL rules are likely to cause taxpayers.

However, foreign countries’ adoption of Pillar Two rules will exacerbate their impact. The rules make clear that for purposes of a qualified domestic minimum top-up tax (QDMTT) or income inclusion rule (IIR) top-up tax, foreign use is considered to occur where a portion of the deductions or losses that comprise a DPL is taken into account in determining net Global Anti-Base Erosion Rules income for a QDMTT or IIR or in determining qualification for the Transitional Country-by-Country Safe Harbor.[10] There is also a transition rule providing that, for this purpose, QDMTTs and IIRs are not taken into account for taxable years beginning before August 6, 2024.[11] This means that calendar year taxpayers who have not consented early to the DPL rules generally should not have a DPL inclusion amount in 2024 solely as a result of Pillar Two taxes, but, depending on their facts, could have an inclusion next year if proactive measures are not taken.

NEXT STEPS

Now is the time for multinational taxpayers to evaluate their risk under the DPL rules. Taxpayers with a domestic corporation in their structure should think carefully before making check-the-box elections to treat foreign entities as disregarded entities.[12] Moreover, taxpayers should determine whether their domestic corporations own any foreign disregarded entities or other specified entities that will cause them to be deemed to consent to the rules as of August 6, 2025.

Multinational taxpayers also should determine whether they have disregarded interest payments, structured payments, or royalties that fall under the purview of the rules. If so, they should consider whether they will be able to avoid future triggering events or if “foreign uses” of DPLs will be unavoidable. One should pay particular attention to Pillar Two, including the Transitional Country-by-Country Safe Harbor, when considering whether there could be a foreign use.

Taxpayers who cannot avoid triggering events should consider whether, and when, to take some defensive measures. Such actions might include winding up foreign disregarded entities that could be subject to the rules, eliminating disregarded payments that would result in DPL income inclusions,[13] or taking other restructuring steps (e.g., electing to treat certain foreign disregarded entities as associations, as the Treasury suggests). When determining whether to take defensive actions, taxpayers should consider the impact that DPL inclusions could have on their overall tax profile, including sourcing issues, foreign tax credits, and the Section 163(j) limitation on business interest deductions. In terms of timing, taxpayers also should consider whether they have until August 5, 2025, to unwind any arrangements subject to the DPL rules or whether it may be prudent to unwind any such arrangements before the end of the year.

Finally, taxpayers concerned about these rules should watch for news about whether they will be issued in final form. The results of the 2024 US presidential election call into question whether the proposed rules will be finalized or, conceivably, shelved.[14] These considerations further complicate the question of whether and when multinational taxpayers should act in response to the rules, particularly as the clock continues to tick toward the deemed consent date of August 6, 2025.

Endnotes

[1] The proposed regulations also can apply to payments made by a foreign disregarded entity to other foreign disregarded entities owned by the same domestic corporate parent.

[2] REG-105128-23.

[3] Although not analyzed in detail here, the proposed changes to the DCL rules are also significant and taxpayers should consider their impact.

[4] For example, the foreign deduction or loss can be used through a loss surrender or consolidation regime.

[5] For example, this may occur when a foreign disregarded entity makes a payment that is included in another foreign disregarded entity payee’s income for foreign tax purposes.

[6] A specified eligible entity is an eligible entity that is a foreign tax resident or owned by a domestic corporation that has a foreign branch.

[7] The rules also can apply to an entity that is formed or acquired after August 6, 2024, and classified without an election as a disregarded entity.

[8] For example, Section 367 may apply to a deemed contribution to the newly regarded foreign corporation.

[9] Generally, these are items of income and deduction from certain disregarded interest, royalties, and “structured payments” within the meaning of the Section 267A regulations.

[10] A limited exception is available in certain cases where the Pillar Two duplicate loss arrangement rule applies.

[11] This favorable transition rule is subject to an anti-abuse provision that can prevent it from applying.

[12] Taxpayers also should give careful thought to any internal restructurings involving foreign disregarded entities.

[13] Eliminating these payments may, of course, result in a corresponding increase in foreign tax liability.

[14] Commentators to the proposed regulations also have raised substantive invalidity arguments under the Loper Bright framework.

How to Prepare for the Upcoming Filing Deadline Under the Corporate Transparency Act (CTA)

The January 1, 2025 filing deadline under the CTA for filing beneficial ownership information reports (BOI reports) for reporting companies formed prior to January 1, 2024 is rapidly approaching.

January 1, 2025 Filing Deadline

The CTA became effective on January 1, 2024. If you have filed a BOI report in the last 11 months, it may have been in connection with BOI reporting requirements for entities formed in 2024, because any reporting company formed on or after January 1, 2024 is required to submit its initial BOI report within 90 days of the filing of formation documents. However, the CTA’s BOI report requirements also apply to entities formed before 2024 (as well as to entities formed in 2025 and beyond), and the deadline for filing BOI reports for these entities is fast approaching. BOI reports for entities formed before 2024 must be filed by January 1, 2025, and as further discussed below, BOI reports for entities formed on or after January 1, 2025 must be filed within 30 days of the filing of formation documents.

Compliance with the Corporate Transparency Act

Below are several initial steps to take to prepare for this upcoming deadline:

1. Exemptions. Assuming your entity was formed by the filing of a document with a secretary of state or any similar office under the law of a State or Indian Tribe, your entity may be a reporting company subject to the CTA. If so, review the 23 exemptions to being a reporting company and confirm if any of these exemptions apply to any of your entities.

An entity formed as noted above that qualifies for any of these 23 exemptions is not required to submit a BOI report to the Financial Crimes Enforcement Network (FinCEN).
An entity formed as noted above that does not qualify for any exemption is referred to as a “reporting company” and will be required to submit a BOI report to FinCEN.

2. Entity Records. Review the entity records for each reporting company and confirm that these records reflect accurate, up to date information with respect to the ownership percentages, management, etc. of each entity within the structure.

3. Determine Beneficial Owners. There are two types of reporting company beneficial owners: (i) any individual (natural person) who directly or indirectly owns 25% or more of a reporting company, and (ii) any individual (including any individual who owns 25% or more of the reporting company) who directly or indirectly exercises substantial control over the reporting company. FinCEN expects that every reporting company will be substantially controlled by at least one individual, and therefore will have at least one beneficial owner. There is no maximum number of beneficial owners who must be reported.

4. FinCEN Identifiers. Once the individual(s) who qualify as beneficial owners of any of your reporting companies have been identified, you may obtain FinCEN identifiers for these individuals. Although this step is not required, obtaining a FinCEN identifier will allow you to report an individual’s FinCEN identifier number in lieu of his or her personal beneficial ownership information in the BOI report filed for the reporting company in which he or she has been determined to be a beneficial owner. If/when any beneficial ownership information changes for that individual, the individual will be required to update the beneficial ownership information associated with his or her FinCEN identifier, but each reporting company which this individual is a beneficial owner of will not be required to file a corresponding update (unless an update is required for a separate reason).

5. Prepare to File BOI Reports Sooner Rather than Later. With the January 1, 2025 filing deadline fast approaching and over 32 million entities expected to be impacted by the CTA, we recommend taking the steps to prepare and file BOI reports for your reporting companies as soon as possible. While awareness of the CTA and its requirements continues to grow, people still have questions and concerns regarding how their personal information will be handled, and it can take time to collect the necessary information. Accordingly, identifying any beneficial owners and requesting their beneficial ownership information as soon as possible will help to avoid any last-minute scrambles to prepare and file your reporting companies’ BOI reports. Some have questioned whether BOI reports are subject to disclosure under the Freedom of Information Act (FOIA). FinCEN has pointed out that these reports are exempt from disclosure under FOIA.

6. Reach Out With Questions. We have a team of attorneys, paralegals and support staff that would be happy to help guide you through this process.

The Corporate Transparency Act in 2025 and Beyond

In addition to reporting requirements for reporting companies formed before 2024 and during 2024 as outlined above, all entities formed in 2025 and beyond that qualify as reporting companies will be required to submit BOI reports within 30 days of the filing of formation documents. This is a significantly shorter filing window than what was imposed on entities formed before and during 2024. Accordingly, moving forward, for entities formed in 2025 and beyond, the CTA should be viewed as an additional step in the entity formation process.

The CTA also imposes requirements for updating BOI reports following any changes to the beneficial ownership information reported on a BOI report. Any changes to the beneficial ownership information must be reflected in an updated BOI reports filed with FinCEN no later than 30 days after the date on which the change occurred (note, the same 30-day timeline applies to changes in information submitted by an individual in order to obtain a FinCEN identifier).

CFPB Imposes $95 Million Fine on Large Credit Union for Overdraft Fee Practices

On November 7, 2024, the CFPB ordered one of the largest credit unions in the nation to pay over $95 million for its practices related to the imposition of overdraft fees. The enforcement action addresses practices from 2017 to 2022 where the credit union charged overdraft fees on transactions that appeared to have sufficient funds, affecting consumers including those in the military community, in violation of the CFPA’s prohibition on unfair, deceptive, and abusive acts or practices.

The Bureau alleges that the credit union’s practices, particularly in connection with its overdraft service, resulted in nearly $1 billion in revenue from overdraft fees over the course of five years. According to the Bureau, the credit union unfairly charged overdraft fees in two ways. First, it charged overdraft fees on transactions where the consumer had a sufficient balance at the time the credit union authorized the transaction, but then later settled with an insufficient balance. The Bureau noted that these authorize-positive/settle-negative violations have been a focus of federal regulators since 2015, and were the subject of a CFPB circular in October 2022. Second, when customers received money though peer-to-peer payment networks, the credit union’s systems showed the money as immediately available to spend. However, the credit union failed to disclose that payments received after a certain time of the day would not post until the next business day. Customers who tried to use this apparently available money were then charged overdraft fees

In addition to monetary fines, the CFPB’s order prohibits the credit union from imposing overdraft fees for authorize-positive, settle negative transactions, and also in cases where there was a delayed crediting of funds from peer-to-peer payment platforms.

The monetary penalties the consent order imposes consist of $80 million in consumer refunds for wrongfully charged overdraft fees and a $15 million civil penalty to be paid to the CFPB’s victims relief fund.

Putting It Into Practice: This order aligns with federal and state regulators’ recent focus on overdraft fees in a broader initiative to eliminate allegedly illegal “junk fees” (a trend we previously discussed here, here, and here). For companies operating in the financial sector or providing peer-to-peer payment services, this enforcement action serves as a critical reminder of the need for transparency and adherence to consumer financial protection laws. Regular audits of fee practices and disclosures can help identify and rectify potential compliance issues before they escalate. Companies aiming to impose overdraft or other types of fees should review agency guidance enforcements to ensure their internal policies and business practices do not land them in hot water.

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Lawsuit Challenges CFPB’s ‘Buy Now, Pay Later’ Rule

On Oct. 18, 2024, fintech trade group Financial Technology Association (FTA) filed a lawsuit challenging the Consumer Financial Protection Bureau’s (CFPB) final interpretative rule on “Buy Now, Pay Later” (BNPL) products. Released in May 2024, the CFPB’s interpretative rule classifies BNPL products as “credit cards” and their providers as “card issuers” and “creditors” for purposes of the Truth in Lending Act (TILA) and Regulation Z.

The FTA filed its lawsuit challenging the CFPB’s interpretative rule in the U.S. District Court for the District of Columbia. The FTA alleges that the CFPB violated the Administrative Procedure Act’s (APA) notice-and-comment requirements by imposing new obligations on BNPL providers under the label of an “interpretive rule.” The FTA also alleges that the CFPB violated the APA’s requirement that agencies act within their statutory authority by ignoring TILA’s effective-date requirement for new disclosure requirements and imposing obligations beyond those permitted by TILA. The FTA also contends that the CFPB’s interpretive rule is arbitrary and capricious because it is “a poor fit for BNPL products,” grants “insufficient time for BNPL providers to come into compliance with the new obligations” imposed by the rule, and neglects “the serious reliance interests that [the CFPB’s] prior policy on BNPL products engendered.”

In a press release announcing its lawsuit, the FTA said the BNPL industry would welcome regulations that fit the unique characteristics of BNPL products, but that the CFPB’s interpretive rule is a poor fit that risks creating confusion for consumers. “Unfortunately, the CFPB’s rushed interpretive rule falls short on multiple counts, oversteps legal bounds, and risks creating confusion for consumers,” FTA President and CEO Penny Lee said. “The CFPB is seeking to fundamentally change the regulatory treatment of pay-in-four BNPL products without adhering to required rulemaking procedures, in excess of its statutory authority, and in an unreasonable manner.”

The FTA’s pending lawsuit notwithstanding, BNPL providers may wish to consult with legal counsel regarding compliance with the CFPB’s interpretive rule. Retailers marketing BNPL products should also consider working with legal counsel to implement third-party vendor oversight policies to enhance BNPL-partner compliance with the rule.

Category: finance

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