On April 4, 2016, the US Internal Revenue Service issued a proposal under Section 385 of the Internal Revenue Code with respect to the treatment of instruments issued by corporations in related-party transactions as debt or equity for federal tax purposes. On the same day, the US Treasury Department also took action to limit US corporate “inversions” and to restrict earnings stripping aspects of such transactions.
Specifically, the US Treasury regulations would, among other things, limit corporate inversions by disregarding foreign parent stock attributable to certain prior inversions or acquisitions of US companies. Additionally, debt issued by a US subsidiary to its foreign parent would be treated as equity under certain circumstances. The proposals have raised concerns with respect to the impact on US subsidiaries of foreign banking organizations, specifically intermediate holding companies subject to the Federal Reserve Board’s total loss absorbing capacity (TLAC) requirements. These new proposals add further complexity regarding the tax treatment of TLAC debt.]
The IRS proposed regulations are available at: https://www.gpo.gov/fdsys/pkg/FR-2016-04-08/pdf/2016-07425.pdf and the Treasury Department press release is available at: https://www.treasury.gov/press-center/pressreleases/Pages/jl0405.aspx.