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The Final Version of Controversial Reg 385 Contains Some Regulatory Relief for Treasurers

  • By Ira Apfel
  • Published: 10/14/2016

AFP-16_Article_IRSOctober 14, 2016 has become a key date in the regulatory history of corporate treasury and finance.

Long-awaited money-market fund regulations took effect today that will make short-term investing more complicated. But another final rule suddenly appeared today as well—the final regulation on controversial U.S. Treasury and Internal Revenue Service proposals aimed at reducing earnings stripping.

With the surprise announcement came good news for treasury and finance: the final rule exempts cash pooling. That’s a victory for treasury and finance executives, who argued that eliminating cash pooling had nothing to do with earnings stripping and would make their jobs exceedingly more difficult.

“In response to thoughtful feedback, Treasury is providing a broad exemption for cash pools and other loans that are short-term in both form and substance, and therefore do not pose a significant earnings stripping risk,” the U.S. Treasury announced in a statement. “Treasury and IRS expect that the exemption will generally permit companies to continue to treat as debt short-term instruments issued among related entities in the ordinary course of a group’s business.”

Another big concession: Easing of documentation requirements on intercompany loans. “Treasury has relaxed the intercompany loan documentation rules for U.S. borrowers, including by moving the deadline for required documentation to when the tax return is due. The regulations also extend the effective date of the documentation rules by one year to January 1, 2018.” 

The final rules on Regulation 385 of the tax code also provide the following exceptions “where the risk of earnings stripping is low”: 

  • Transactions between foreign subsidiaries of- U.S. multinational corporations. “Treasury has determined the income tax consequences of mischaracterizing equity instruments as debt in these circumstances are limited.”
  • Transactions between S-corporations. “Treasury has determined that the income tax consequences of mischaracterizing equity instruments as debt in these circumstances are limited.”
  • Expanding exceptions for ordinary business transactions: “Treasury has expanded the exceptions for distributions [payments made to affiliated companies], to generally include future earnings and allowing corporations to net distributions against capital contributions.”

Read more here.

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