The Internal Revenue Service has proposed new regulations that
would generally treat intercompany indebtedness in corporate groups
with 80% common ownership as equity for U.S. tax purposes. The new
restrictions are proposed to be effective for any indebtedness
issued on or after April 4, 2016, with limited exceptions; however,
equity treatment would not be required for such debt before final
regulations are issued. It is likely that the regulations will be
finalized this year or not at all. Although intended primarily to
reduce earnings-stripping opportunities in the cross-border
context, including by inverted companies, the rules would apply
much more broadly.
The proposed regulations seek to overturn the long-standing rule
enunciated by the Second Circuit Court of Appeals in Kraft v.
Commissioner1 that permits a corporation to make a
distribution in the form of its own promissory notes to create an
indebtedness to its sole shareholder. The proposed
