IRS Issues Proposed Regulations That Would Recast Certain Debt Instruments As Equity

On April 4, 2016, the IRS and U.S. Treasury Department issued proposed Treasury Regulations designed to curb the ability of large multinational companies to reduce their U.S. taxable income by engaging in "earnings stripping" practices (the "Proposed Regulations").¹ If finalized, these rules, promulgated under section 385 of the Internal Revenue Code, would significantly impede several tax-planning options available to large multinationals.

Notwithstanding the ominous implications, the Proposed Regulations are subject to three major limitations. First, they apply only to related-party debt—specifically, so-called "expanded group instruments," or "EGIs."². Second, they will impact only large corporations.³ Third, as Proposed Regulations, the new rules do not yet have the force of law and generally will go into effect no earlier than the date on which ultimately finalized.⁴