Certain proposed section 385 documentation requirements are being delayed.
This IRS decision to push off the application of certain proposed documentation requirements under the section 385 regulations requirements will only apply to debt issued or deemed issued on or after January 1, 2019. These regulations, which address the documentation necessary to determine whether a debt in a corporation is treated as stock or indebtedness, were initially to apply to debts issued or deemed issued on or after January 1, 2018. The recast rules are unaffected by this delay and remain in force for all debt issued on or after April 4, 2016.
The IRS notice states that its intention to amend the documentation regulations to apply only to interests issued or deemed issued on or after January 1, 2019 is in response to taxpayer's concerns. The IRS has requested comments by September 1, 2017 on whether this delay provides adequate time to comply.
The section 385 regulations, which apply to certain related-party indebtedness issued by U.S. corporations, were published on October 13, 2016 (see TaxNewsFlash-Canada 2016-47, "U.S. Issues Final Rules on Related-Party Financing"). These regulations contain certain documentation rules, and rules that can possibly recast such debt as equity in certain situations. Both of these rules have sweeping implications, particularly for non-U.S.-parented (e.g., Canadian) multinationals.
Before a U.S. debt may be respected as debt under the section 385 regulations, the issuing corporation must satisfy numerous documentation requirements. Subject to certain limited exceptions, if these requirements are not met, the instrument is automatically recharacterized as equity. This can lead to adverse U.S. tax consequences in many circumstances.
The IRS recently sought comments on the Section 385 rules, specifically, it asked for feedback on whether the related-party financing rules should be changed or eliminated.
For more information, contact your KPMG adviser.