Treasury's Sweeping Proposed Regulations Attack Related-Party Debt

8 April 2016
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Key takeaways

  • On April 4, 2016, the Treasury Department and the IRS issued proposed regulations that would treat certain debt instruments issued between related parties as stock for U.S. federal income tax purposes.
  • Although issued in conjunction with temporary regulations targeting inversion transactions, the proposed regulations have a far broader scope. In addition to covering certain “earnings stripping” transactions that frequently accompany an inversion, the proposed regulations cover many other transactions, such as cross-border lending among members of multinational groups, “debt pushdowns” in connection with mergers and acquisitions, and issuances of related-party debt by certain life insurers and subsidiaries of REITs.
  • The proposed regulations generally (i) treat related-party debt instruments issued in certain transactions as equity interests, (ii) establish documentation and information maintenance requirements, certain of which must be satisfied throughout the life of a related-party debt instrument in order for such instrument to be respected as debt, and (iii) authorize the IRS to bifurcate certain related-party instruments and treat them as debt in part and stock in part.
  • These rules represent a dramatic departure from the current facts and circumstances approach to determining whether a particular instrument is treated as debt or equity for tax purposes. Some of the new rules are proposed to be effective to debt instruments issued on or after April 4, 2016.