Cadwalader attorneys examined the newest final and temporary regulations ("Regulations") under section 385 of the Internal Revenue Code. The Regulations are intended to prevent the shifting of debt and interest from the U.S. operations of multinational companies to U.S. subsidiaries.
Issued in April 2016, the proposed Regulations attracted controversy due to their broad reach and strict requirements. Critics argued that the Regulations exceeded the authority granted by Congress to the U.S. Treasury Department. The overall structure of the new Regulations remains largely the same as that of the proposed rules, although significant issues have been reserved, including the application of the final regulations to foreign issuers of intercompany debt. Important exceptions were added as well, including for certain short-term cash pooling arrangements. Cadwalader attorneys noted that the final Regulations will apply to taxable years ending after January 18, 2017 and debt instruments issued after April 4, 2016, while the documentation requirements will apply to debt instruments issued after December 31, 2017.
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