Treasury Department Proposes Removing Debt-Equity Documentation Requirements

The Treasury Department proposed eliminating or modifying documentation regulations in Section 385 of the Internal Revenue Code on September 21, 2018. The regulations, which were initially intended to discourage corporations from reducing their tax burdens by recharacterizing debt as equity and engaging in “earnings stripping,” established documentation requirements for related-party debt obligations to be treated as debt for federal tax purposes. The regulations specifically aimed to reduce earnings stripping in the context of “corporate inversions,” where domestic companies merge with their foreign counterparts to benefit from lower foreign tax rates. In 2017, the Treasury Department flagged the requirements as part of its implementation of President Trump’s executive order instructing the Treasury Department to identify and reduce tax regulatory burdens and sought public comment on the regulations. After considering the comments, the Treasury Department stated that the requirements should be eliminated. The regulations were published in the Federal Register on September 24, 2018.