Treasury and IRS Issue Final Regulations Restricting Earnings Stripping Through Related-Party Debt

18 October 2016
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Key takeaways

  • On October 13, 2016 the Treasury Department and Internal Revenue Service issued final and temporary regulations recharacterizing certain debt instruments issued between related parties as stock for U.S. federal income tax purposes. These regulations are intended to reduce the tax benefits of inversion transactions. However, the actual scope of the Final Regulations is far broader.
  • The Final Regulations are substantially narrower than originally proposed. The Final Regulations do not apply to debt issued by foreign corporations and also include exceptions for debt issued by certain other entities, including regulated financial companies and regulated insurance companies. As in the Proposed Regulations, the Final Regulations do not apply to debt between members of a U.S. consolidated group.