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On April 4, 2016, the U.S. Treasury Department and the Internal Revenue Service issued proposed regulations under Internal Revenue Code Section 385 that address whether, for U.S. federal tax purposes, an interest in a related corporation is treated as debt or equity, notwithstanding that it is in the form of debt (the “Proposed Regulations”). The Proposed Regulations were issued as part of a larger regulation package targeting inversions; however, they apply broadly and go beyond post-inversion tax avoidance. The Proposed Regulations will affect common cross-border transactions and structures (both “inbound” and “outbound” and domestic) and treasury management practices. The Proposed Regulations generally are intended to be effective with respect to financial instruments issued on or after April 4, 2016 but only with effect from the date that is 90 days after the regulations become final. In view of this effective date, taxpayers immediately should assess the impact of the proposed rules.
The Proposed Regulations, subject to certain exceptions, require taxpayers to prepare and maintain documentation and information to substantiate the treatment of an interest issued between related parties as debt for U.S. federal tax purposes. There are special requirements for substantiation of revolving credit arrangements and cash pools as debt. The Proposed Regulations provide that substantiation is necessary, but is not dispositive, for a purported debt interest to be treated as debt. General U.S. federal income tax principles also apply to the determination.
The Proposed Regulations provide that, even if an interest otherwise is treated as debt by reason of satisfaction of the documentation requirements and application of general U.S. federal income tax principles, additional rules may cause treatment as equity. These rules treat a purported debt instrument as equity where a corporation (1) distributes the debt instrument to a related party as a dividend, (2) issues the debt instrument to a related party in exchange for stock of a related party or (3) issues the debt instrument to a related party in exchange for assets in a tax-free reorganization. In addition, a debt instrument issued to fund one of these transactions is treated as equity. As a result, a common transaction between or among related parties may have unexpected consequences, including that interest on the re-characterized instrument is not deductible and may be subject to dividend withholding tax.
The Proposed Regulations generally do not apply to individuals or consolidated groups. However, they include rules that apply to (1) interests that cease to be interests between members of the same consolidated group but become interests between covered related parties and (2) interests between covered related parties that become interests between members of the same consolidated group.
The Proposed Regulations, accordingly, apply broadly, and taxpayers should become familiar with the new framework for classification of an interest in a corporation as debt or equity. In the absence of familiarity, taxpayers may face unexpected consequences with respect to seemingly routine matters.
During this program, our panelists will discuss:
• The underlying concerns that prompted issuance of the Proposed Regulations;
• The corporations and partnerships to which the Proposed Regulations apply;
• The transactional scope of the Proposed Regulations;
• The documentation and information requirements for treatment of a purported debt instrument as debt, and exceptions to these requirements;
• Common transactions and structures that will cause an instrument otherwise treated as debt to be treated as equity, and exceptions;
• How the Proposed Regulations interact with the debt/equity rules of selected European countries in both “inbound” and “outbound” transactions; and
• Proactive approaches to ensure treatment of an in-form debt instrument as debt.
• There will be sufficient time for questions and answers.
• Summarize the Proposed Regulations, so that their impact on structural and transactional matters can be assessed.
• Suggest proactive steps to minimize the impact of the Proposed Regulations.
• Practical guidance as to structuring cross-border debt between the United States and various European countries.
Who would benefit most from attending this program?
Corporate Counsels, Tax advisors, CPAs.
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Alan Winston Granwell has practiced in the area of international taxation for over 45 years. He is of counsel to Sharp Partners P.A. His practice encompasses representing multinational corporations and high net worth individuals on cross-border planning and controversy matters. In the past few years, he has become active in advising financial institutions and their clients on international tax enforcement initiatives, with special emphasis on the DOJ's Swiss Bank Program and the Foreign Account Tax Compliance Act. He was the International Tax Counsel and Director of International Tax Affairs of the US Treasury Department 1981-1984.
Robert G. Lorndale, Jr. is a partner with Sharp Partners P.A. He has practiced corporate tax law for 20 years, representing multinational and other corporate groups. Mr. Lorndale’s practice involves the federal income taxation of business transactions, including mergers and acquisitions, dispositions, spin-offs and restructurings. He represents clients seeking private letter rulings from the IRS. In addition, Mr. Lorndale represents clients in tax controversies with the IRS and other tax authorities.
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