Treasury And The IRS Introduce Significant Changes In The Final Section 385 Regulations On Intercompany Debt

On October 13, 2016, the US Treasury Department ("Treasury") and the Internal Revenue Service ("IRS") issued final and temporary regulations (the "Final Regulations") under section 385 of the Internal Revenue Code as the follow-up to the proposed regulations (the "Proposed Regulations") issued on April 4. The Proposed Regulations had the potential to produce far-reaching effects on US and foreign companies, overturning the long-standing treatment of certain intercompany debt arrangements and subjecting them to the risk of an equity recharacterization for US tax purposes.

These Final Regulations generally maintain the overall theme of the Proposed Regulations. However, the Final Regulations provide some welcome limitations to the scope of those rules as well as certain exceptions and clarifications that mitigate some of the concerns identified with the Proposed Regulations.