On 4 April 2016, the IRS and Treasury issued proposed regulations under the authority of Section 385 of the Internal Revenue Code. Taxand USA attempts to answer some of the questions that internal tax departments are currently thinking about and how to deal with some of the practical aspects of complying with these new regulations — specifically, how to deal with the new documentation requirements for certain related-party debt in a practical manner.
Numerous commentators have questioned the IRS and Treasury’s authority to create several of the rules in these regulations. As a result, their validity may or may not be upheld in court, if the regulations are finalised as proposed.
Unfortunately, while the possibility of a future court battle between taxpayers and the IRS over these regulations may be of major academic interest, it is of no present or practical help to internal tax departments that are undoubtedly asking the questions, “What do these regulations mean to my company? What should I be doing about them now?”
It is important to note that these proposed documentation rules would merely formalise the obligation to document certain key points that we would typically expect to be present for related-party instruments, in order for them to be respected as debt rather than be recast as equity (other rules dealing with certain intercompany debt transactions in the new 385 regulations do more than just formalise documentation requirements; they actually re-characterise certain transactions as equity).
Thus, many of our suggestions below are applicable to all related-party debt instruments as a matter of “best practices,” even instruments that are technically not subject to the new documentation regulations.
Discover more: Proposed new documentation rules for related-party debt: A practical approach
For similar content to our Global Guide, subscribe to our mailing list and keep up to date.
A proactive approach to the new documentation requirements under Proposed Treasury Regulations Section 1.385-2 can help relieve some stress in the case that the intercompany debt arrangement is later audited or challenged by the IRS. It can also help to establish the fact that your instrument should be considered debt for US federal income tax purposes by the IRS and your attest firm.
