Taxand USA provides an overview of the tainted transaction rules of Final Regulation Section 1.385-3, including the controversial funding rule. This article also discusses some potential traps for non-US based multinationals with US subsidiaries under these rules.
Many companies breathed a sigh of relief at the release of temporary and final regulations under Internal Revenue Code Section 385 on 13 October 2016. The final regulations severely limit the scope of the previously proposed regulations, which were issued on 3 April 2016. Most notably, the final regulations do not apply (yet) to debt issued by foreign companies, as the final regulations reserve on foreign issuers. Thus, for the time being, the final regulations apply only to debt issued by US companies. This change greatly limits the applicability of these regulations to US based multinational organisations. Unfortunately, this limitation is of little to no help to non-US based multinationals with US subsidiaries.
It is important to note that there is considerable speculation that the upcoming Trump Administration may eliminate the final regulations. That being said, the portions of the final regulations dealing with certain tainted transactions are currently in effect. The final regulations also include certain documentation requirements that do not take effect until 1 January 2018. For that reason, in light of the recent change in political landscape, this article does not discuss the documentation rules.
If we can give one piece of advice to non-US based multinationals with regard to dealing with the final regulations, it is to be proactive. Be proactive in setting up your capital structure when you establish a new US subsidiary. Be proactive when a US subsidiary plans on paying dividends to its foreign parent, if any US group members have related-party debt to foreign group members.