Potential Impacts of Proposed Section 385 Regulations: Inbound and Outbound Examples

July 08, 2016

Department of Treasury Building

On April 4, 2016, the Department of the Treasury and the Internal Revenue Service (“IRS”) issued a Notice of Proposed Rulemaking under Internal Revenue Code section 385. The Proposed Regulations contain three sets of rules: (1) they authorize the IRS to treat certain related-party debt arrangements as part stock and part debt; (2) they establish a contemporaneous documentation requirement that must be satisfied for certain related-party debt to be respected as debt; and (3) they treat certain categories of related-party debt as equity, including a rule treating debt issued within a 72-month time frame of certain distributions or acquisitions as stock for all purposes of the Code (“Per Se Recharacterization Rules”). 

This report provides four illustrative examples of the potential impact of the Per Se Recharacterization Rules on investment by US-based companies abroad and foreign-based companies in the United States. In addition, the report provides information obtained from a large US company on the hours of resources it estimates it would require to comply with the Proposed Regulations.