US Treasury Anti Inversion Rule

[DooDiligence]

New rule to curb the ability of companies to engage in earnings stripping.

 

Before the rule, a US company which, by means of an inversion has become a subsidiary of a foreign based parent company, could issue a note or bond to the foreign parent & subsequently pay interest to the parent.

 

The interest could then be deducted from the net income of the subsidiary.

 

Under the new rule, the debt can be treated as equity (in certain circumstances) & as such the interest would now be classified as dividend payments & would not be tax deductible.

 

The "in certain circumstances" part will probably mean that if a "debt instrument" is issues by a US subsidiary & they do not receive the funds from the issuance then it would be characterized as a stock transaction instead of a loan.