U.S. Proposes New Rules For Related-Party Debt

On April 4, 2016, the U.S. Treasury Department and the IRS issued proposed regulations which govern whether certain related-party debt instruments will be classified as either debt or equity for U.S. federal income tax purposes. These rules are designed to prevent the excessive shifting of profits between related entities by way of interest charges on related-party debt instruments.

New Rules

These proposed regulations generally introduce the following:

1. New debt Documentation Requirements;
2. The General Rule, which characterizes a debt as equity if it is issued in a prohibited transaction; and
3. The Funding Rule, which characterizes a debt as equity if it is issued to fund a transaction prohibited under the General Rule.