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Non-US Multinationals investing in the US to bear the immediate burden of the new debt rules, under the final 385 Regulations
Taxand UK summarises how the final regulations may generally impact US and non-US multinationals.
On the evening of October 13, 2016, the United States Treasury Department and IRS released final and temporary Section 385 Regulations (Final Regulations) regarding purported related-party debt instruments. These Final Regulations revise the highly controversial proposed regulations issued in April 2016 to address a number of concerns identified during the public comment period. Earlier last week, our US A&M Taxand colleagues spoke at the Tax Executive Institute’s annual conference to share their insights and confirm their thinking on key portions of the regulations with other tax practitioners as well as many Treasury Department officials.
While this article summarises how the final regulations may generally impact US and non-US multinationals and provides an overview of the key provisions (noting significant changes from the proposed regulations), here are a few key points for non-US multinationals:
- Dividend payments out of the US should be reviewed to ensure that they don’t trigger a recast of debt into equity on recent or future borrowing. In fact all equity distributions and asset or stock reorganisations that could have a similar effect as a dividend or resulting in an intercompany debt should be reviewed in this context
- Structuring of current and upcoming intercompany transactions should be revisited with the new regulations in mind
- Loans made into the US after 1 Jan 2018 will need to meet new, more onerous, documentation requirements under the new rules or risk a harsh penalty of being recast
Quality tax advice, globally
The extensive and highly complicated Final Regulations can present a host of unintended and harmful consequences for the ill-prepared taxpayer. With the harsh penalty of a transaction intended to be debt being automatically recast as equity, all taxpayers should analyse these rules when entering into intercompany debt instruments.