BEAT Regulations on Qualified Derivative Payments

On Dec. 18, 2025, Treasury and the IRS issued final regulations clarifying how QDPs of securities lending transactions are determined and reported. The final regulations generally retain the framework and favorable aspects of the proposed regulations published Jan. 14, 2025, while providing additional clarity on classification, documentation, QDP reporting, and BEAT netting rules for determining the base erosion payment amount.

Background

BEAT, enacted under the Tax Cuts and Jobs Act of 2017 and codified in IRC Section 59A, imposes a tax on certain large corporations with average annual gross receipts of at least $500 million over the prior three taxable years that make deductible payments to foreign related parties. The tax is calculated as a percentage of the taxpayer’s modified taxable income, which excludes deductions for base erosion payments.

Section 59A(h) generally excludes QDPs made in the ordinary course of business from base erosion payments if properly reported to the IRS. QDPs are payments under derivatives contracts that are mark-to-market, with related income, gain, loss, and deductions treated as ordinary. A payment is not treated as a QDP unless the taxpayer satisfies the reporting requirements set forth in Treasury Regulation Section 1.6038A-2(b)(7)(ix) and files Form 8991, “Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts,” and associated representations for QDPs.

Notice 2024-43, released on May 22, 2024, deferred the QDP reporting requirements until tax years beginning on or after Jan. 1, 2027.

Key provisions of the final regulations

The final regulations provide additional clarity on the treatment of securities lending transactions for BEAT purposes. Specifically, the final regulations:

• Exclude mark-to-market gains and losses on the securities leg of securities lending transactions from the QDP computation, QDP reporting, and the BEAT netting mechanics used to determine base erosion payments.
• Limit QDP treatment for the securities leg of securities lending transactions to transaction-related income and expense, such as substitute payments by cross-referencing the definitions under Treasury Regulations Sections 1.861-2(a)(7) and 1.861-3(a)(6).
• The proposed regulations provide a specific identification method for determining the amount of substitute or other payments made to foreign related parties. Taxpayers are permitted to use this method if they can either identify all payment recipients or identify the payers of the relevant amount received by the foreign related party. The final regulations clarify that taxpayers that cannot apply the specific identification method must use a prescribed allocation method that effectively treats the payment as if it were made first to foreign related parties.
• Include examples illustrating the application of these rules.

The substantive rules under the final regulations generally apply to tax years beginning on or after Dec. 17, 2025. However, the preamble to the final regulations states that due to an error in the proposed regulations, taxpayers can elect to apply the final regulations to tax years beginning on or after Jan. 10, 2025, and before Dec. 17, 2025. The QDP reporting rules apply to payments made in tax years beginning on or after Jan. 1, 2027.

Crowe observation

For 2025 and 2026 tax years, taxpayers should consider both the timing of the substantive rule changes and whether early adoption of the final regulations can provide a strategic advantage.

Looking ahead

The final regulations add certainty regarding the treatment of mark-to-market gains and losses and substitute payments made to foreign related parties for QDPs in securities lending transactions. Taxpayers should evaluate whether their systems can track items related to securities lending transactions and identify counterparties so they are eligible to take advantage of some of the more favorable aspects of the final regulations. They also should consult their tax advisers to assess the potential benefits of early adoption of the substantive rules under the final regulations for the 2025 and 2026 tax years.