On Friday, July 28, 2017, the U.S. Treasury announced a one-year delay in the implementation of the minimum documentation requirements under the Final Section 385 Regulations. Pursuant to this notice, the documentation rules will apply to instruments issued on or after January 1, 2019 (previously January 2018). Assuming other provisions stand unchanged, calendar year-end taxpayers would not need to produce documentation until Q3 2020.
The Final Section 385 Regulations, published on October 21, 2016, laid out four factors that are "essential" to the treatment of an instrument as debt and established minimum documentation requirements for debt characterization. The documentation requirements originally applied to related party instruments issued on or after January 1, 2018. This effective date was already an extension from the proposed regulations which stated an effective date as of the published date of the final rules. In the preamble to the Final Section 385 Regulations, the U.S. Treasury made it clear that this extension was in direct response to the thousands of comments received by taxpayers and the broader tax community claiming that there was inadequate timing for taxpayers to develop necessary systems or processes for compliance.
In Friday's Notice 2017-36, which announced the extension to 2019, the U.S. Treasury asserted that the latest extension was also at least in part in response to continued concern of taxpayers. The U.S. Treasury also acknowledged that the extension may be in part tied to the ongoing review of the Final 385 Regulations, as announced earlier this month in Notice 2017-38. Notice 2017-38 was in direct response to President Trump's Executive Order to examine recent tax regulations that may place an undue burden on taxpayers. Per Notice 2017-38, a second report with recommendations on specific actions to be taken related to the Final 385 regulations is expected by September 18, 2017.
In the interim, interested parties can provide comments on Notice 2017-38 (the review of potentially burdensome tax regulations) and Notice 2017-36 (the effective date extension) by August 7, 2017 and September 1, 2017, respectively.
Duff & Phelps will continue to provide updates as these regulations evolve. Taxpayers should continue to consider the characterization of an intercompany debt issuance as bona fide debt when issuing new debt or refinancing, as it is clear that irrespective of the fate of the 385 regulations, this topic is on the radar of the U.S. Treasury, the IRS and the broader global regulatory community. Furthermore, other U.S. regulatory guidance and common law governing debt characterization still stands.