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The U.S. Treasury finalized regulations to address "earnings stripping" by strengthening tax rules distinguishing between debt and equity.
The new regulations restrict the ability of corporations to engage in earnings stripping after an inversion (a transaction in which a U.S.-parented multinational group changes its tax residence to reduce or avoid paying U.S. taxes). Specifically, the regulations make it more difficult for companies to invert by limiting inversions through disregarding foreign parent stock attributable to certain prior investments or acquisitions of U.S. companies.
The regulations address the issue of earnings stripping by:
- targeting transactions that increase related-part debt that does not finance new investment in the United States;
- allowing the IRS on audit to divide a purported debt instrument into part debt and part stock; and
- requiring documentation for members of large groups to include key information for debt-equity tax analysis.
In addition, Treasury issued temporary regulations implementing two previous actions released in 2014 and 2015 setting forth rules that:
- address a technique by which U.S. companies may seek to avoid section 7874 by structuring an inversion as a multi-step transaction using back-to-back foreign acquisitions; and
- require a foreign subsidiary of the inverted U.S. group to recognize all realized gain upon certain post-inversion transfers of assets that dilute the inverted U.S. group's ownership of those assets.
Finally, the Treasury announced that the regulations also extend the effective date of the documentation rules by one year to January 1, 2018.
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