Tax Insights – Proposed Regulations on Debt vs. Equity

The United States Treasury Department (Treasury) proposed regulations on April 4, 2016, that re-characterize some related-party debt as equity. The re-characterization of debt as equity will tend to increase tax costs. The proposed regulations are slated to take effect Sept. 5, 2016, and apply to any related party debt issued on or after April 4, 2016.

At their simplest, these rules will greatly increase the burden on companies whose intercompany debt is for sound business reasons with no tax motivation. At the most invasive, debt will effectively be prohibited in certain types of transactions without regard to purpose or validity.

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