Publications

On October 13, 2016, the Internal Revenue Service (the “IRS”) and Treasury Department issued final and temporary regulations under Section 385 of the Internal Revenue Code addressing the federal income tax treatment of debt between certain related parties. Although significantly reduced in scope from the proposed version of those rules (issued in April 2016), the new regulations could meaningfully limit the ability of U.S. entities to engage in earnings stripping through the issuance of debt to their non-U.S. affiliates and otherwise alter the federal income tax treatment of transactions (including those without a tax avoidance motive). In addition, the documentation requirements in the regulations may represent a substantial compliance burden for corporate groups. The regulations generally (i) treat debt between members of an “expanded group” as equity for U.S. tax purposes if the debt is issued in connection with certain specified transactions and (ii) impose threshold documentation requirements with respect to debt between members of an expanded group that must be satisfied for the debt to be respected for federal income tax purposes. The regulations generally implement the basic framework adopted in the proposed regulations, but eliminate a rule authorizing the IRS to treat debt between certain related parties as equity in part and debt in part and also adopt a number of significant exceptions to equity recharacterization (including an exemption for debt issued by a non-U.S. borrower and an offset for capital contributions).