On April 4, 2016, the Treasury Department and the IRS issued temporary regulations under Section 7874 on inversion transactions that added some new restrictions and implemented provisions previewed in two prior IRS notices (the “Inversion Notices”). The Treasury Department and the IRS also set forth new rules in proposed regulations under Section 385 that seek to reduce or eliminate earnings stripping between certain related parties. While the temporary regulations under Section 7874 focus on inversion transactions, the proposed earnings stripping regulations under Section 385 may prevent corporations (whether domestic or foreign) from leveraging between or among related parties in order to reduce their taxable income. Since the proposed earnings stripping regulations are not limited to inversion transactions, they will have a broad application for corporations or partnerships that issue debt instruments to related parties if these proposed rules are enacted as final regulations in their present form.
View full memo, Treasury and IRS Issue Regulations on Inversions and Earnings Stripping