Monday, 11 April 2016

Proposed Treasury Regulations under Section 385 would have profound impact on related party financings

On April 4, 2016, the IRS and Treasury issued proposed Section 385 regulations that address whether an interest in a related corporation is treated as stock or indebtedness, or as in part stock and in part indebtedness.

The Proposed Regulations appear to be intended to limit the effectiveness of certain types of tax planning by characterizing related party financings as equity, even if they are in form straight debt instruments.  The types of transactions targeted appear to include debt through note distributions in the inbound and outbound context, and debt repatriation in the outbound context.

It is critical to note, however, that the application of these Proposed Regulations is not limited to these types of transactions; the Proposed Regulations would instead apply generally to characterize as equity broad categories of related party debt transactions that routinely arise in the ordinary course of operations in both the domestic and international context.

The Proposed Regulations therefore could have a profound impact on a range of modern treasury management techniques, including cash pooling.  The Proposed Regulations would generally apply to financial instruments issued after April 4, 2016, with effect from the date 90 days after regulations are issued in final form.  Given this effective date, taxpayers must consider the potential impact of these Proposed Regulations on current transactions.

Source & more info: PwC