How Proposed Regulation 385 Could Impact Corporate Treasury

by Rob Vettoretti, Managing Director, PwC Advisory

On 4 April 2016, the Internal Revenue Service (IRS) and the US Treasury Department issued proposed regulations under Section 385 targeting related party funding transactions, specifically addressing whether a debt instrument should be treated as debt, equity, or a combination thereof, for US federal income tax purposes. In addition, these proposed regulations would establish significant documentation requirements in order for certain related-party transactions to be treated as debt for US federal income tax purposes. 

Although these proposed regulations are intended to limit ‘earning stripping,’ using cross-border debt to reduce US income taxes, their application is so broad that they would impose prohibitive tax costs on many routine treasury activities and could have a profound impact on how treasury effectively deploys and manages cash globally. 

The proposed regulations, which could be finalised by late summer or early fall 2016, will be effective for transactions executed on or after 4 April, 2016 and apply to related party debt transactions of an “expanded group”; basically, intercompany financing for closely related parties.

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