05 December 2022 - Article
On September 21, 2018, the U.S. Department of the Treasury proposed axing Obama-era documentation requirements aimed at discouraging corporate inversions. The regulations under Internal Revenue Code Section 385 prevent “earnings stripping,” which involves the movement of funds in the form of loans from subsidiaries in low- or zero-tax regions to subsidiaries in higher tax jurisdictions. Under current regulations, any such transaction is subject to recharacterization of the debt as equity, thereby preventing interest payments on the loans from being tax-deductible. The rules established documentation requirements for purported debt obligations among related parties to be treated as debt for federal tax purposes. After considering comments from the public, the Treasury concluded that the documentation requirements should be repealed, potentially saving companies millions. For more information see https://www.federalregister.gov/documents/2018/09/24/2018-20652/proposed-removal-of-section-385-documentation-regulations
This article was written with contributions from Tim Piscatelli.