Proposed Regulations May Disrupt Intercompany Debt Practices

Introduction

The US Department of the Treasury issued proposed regulations on April 4, 2016, addressing the characterization of certain instruments as debt or equity for US federal income tax purposes (Proposed Regulations). The Proposed Regulations have been issued as part of a series of Treasury pronouncements designed to limit the ability of US corporations to undertake so-called “inversion” transactions, whereby a multinational corporate group owned by a US parent moves its tax residence outside of the United States. The Proposed Regulations, however, have wide-reaching implications beyond the world of inversions.

The Proposed Regulations include three key provisions: (1) the grant of authority to the US Internal Revenue Service to treat certain related-party debt as in part debt and in part equity; (2) the creation of contemporaneous documentation requirements to support debt characterization of certain related-party debt; and (3) a default rule treating debt