Treasury and IRS Remove Intercompany Debt Documentation Rules

On October 31, 2019 the IRS and Treasury made two key announcements regarding the Section 385 regulations which were first introduced in April of 2016. 

The first announcement was that the removal of the documentation requirements set forth in the original Section 385 regulations for intercompany debt had been executed. The documentation requirements would have required taxpayers to provide documentation demonstrating a valid debtor-creditor relationship as well as a reasonable expectation of repayment during the life of the instrument for certain related party debt instruments where the U.S. entity was acting as the borrower. 

The second announcement was to issue a notice of proposed rulemaking to modify the distribution regulations under Section 385. The distribution regulations released under the original Section 385 regulations generally would have treated certain issuances of debt between certain related parties as stock where that debt was issued in connection with a distribution. In the announcement, the IRS and Treasury recognized that the distribution regulations “continue to be necessary at this time”, but that the rules will be modified in order to be “more streamlined and targeted”. Specifically, the announcement states, “The Treasury Department and the IRS intend that the (forthcoming) proposed regulations would not treat a debt instrument as funding a distribution or economically similar transaction solely because of their temporal proximity; rather, the proposed regulations would apply the funding rule to a debt instrument only if its issuance has a sufficient factual connection to a distribution to a member of the taxpayer’s expanded group or an economically similar transaction (for example, when the funding transaction and distribution or economically similar transaction are pursuant to an integrated plan).” The reference to “temporal proximity” relates to the original Section 385 regulations which contained a per se rule that would classify a debt instrument as stock where a distribution or similar exchange of property occurred 36 months before or after the debt issuance. 

Both announcements come on the heels of the Trump Administration’s Executive Order 13789 issued in April 2017 which instructed the Secretary of the Treasury to “review tax regulations issued on or after January 1, 2016, and to take concrete action to alleviate the burdens of regulations that

  • impose an undue financial burden on U.S. taxpayers;
  • add undue complexity to the Federal tax laws; or
  • exceed the statutory authority of the IRS.”

The first announcement regarding the final removal of the Section 385 documentation rules is available here

The second announcement regarding the advance notice of proposed rulemaking regarding the distribution regulations can be found here.

The Treasury and IRS press release issued on October 31, 2019 can be read here

Read Transfer Pricing Times – October 2019

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