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ARTICLE · 09 MAY 2017

Code §163(J) – Ignoring U.S. Thin Capitalization Rules May Leave Tax Advisors Thinly Prepared For Audits

Ruchelman PLLC
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Using deductible interest payments to reduce U.S. taxable income is often a goal of tax practitioners.

United StatesTax
Beate Erwin
Beate Erwin
Kenneth Lobo
Kenneth Lobo
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INTRODUCTION

Using deductible interest payments to reduce U.S. taxable income is often a goal of tax practitioners. These payments are often disbursed to foreign related parties, where the interest income is subject to little or no tax. The U.S. has developed rules that limit the deductibility of these interest payments when the payor is a thinly capitalized corporation and the creditor is a related party that is subject to a reduced tax rate in its country of residence as compared to the U.S. rate. Deductibility is also limited when a person related to the lender makes a "disqualified guarantee" of the debt to an unrelated creditor and no gross basis tax is imposed on the interest.

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