U.S. Treasury Finalizes "Earnings Stripping" Regulations

The U.S. Treasury finalized regulations to address "earnings stripping" by strengthening tax rules distinguishing between debt and equity.

The new regulations restrict the ability of corporations to engage in earnings stripping after an inversion (a transaction in which a U.S.-parented multinational group changes its tax residence to reduce or avoid paying U.S. taxes). Specifically, the regulations make it more difficult for companies to invert by limiting inversions through disregarding foreign parent stock attributable to certain prior investments or acquisitions of U.S. companies.

The regulations address the issue of earnings stripping by:

• targeting transactions that increase related-part debt that does not finance new investment in the United States;