United States

Final Section 385 Regulations: Focus on U.S. Issuers, U.S. Base Erosion, and Documentation

The Treasury Department and IRS released on October 13, 2016, final and temporary section 385 regulations, addressing the treatment of related-party debt for U.S. tax purposes. These regulations had been proposed on April 4, 2016. The final rules offer significant relief for U.S. multinational groups, and offer some, but less significant, relief for foreign multinational groups.

KPMG TaxWatch Webcast

Replay coming soon

KPMG TaxWatch Webcast
Final and Temporary Section 385 Regulations: Refined to Focus on Foreign Multinationals and Limit Application to U.S. Multinationals | October 21, 2016

U.S. Department of the Treasury

Read text of the final regulations and KPMG's Initial reactions to the section 385 final regulations | October 14, 2016

Read Section 385 final regulations: Intial reaction to insurance-specific provisions | October 14, 2016

KPMG's TaxNewsFlash alerts provide summaries of the latest tax regulatory and legislative developments being reported by KPMG International member firms around the world. Access TaxNewsFlash-United States.


Contact Ron Dabrowski
Ron Dabrowski

Principal, Washington National Tax, KPMG LLP
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About the Proposed Regs

On April 4, 2016, the Treasury Department and IRS released proposed regulations under section 385 addressing related-party debt. The regulations would significantly change the taxation of many common cash management transactions for U.S. and non-U.S. multinational groups. The regulations would 1) allow the IRS to bifurcate related-party debt into part equity and part debt; 2) create extensive documentation requirements necessary for related-party instruments to be respected as debt; and 3) recast debt as equity if it issued as part of a perceived base erosion transaction. Although proposed, if finalized the recast rules would phase in for debt issued on or after April 4, 2016. Upon finalization, the documentation requirements would need to be met as soon as 30 days after the issuance of related-party debt.

KPMG LLP's July 7, 2016 Comment Letter

In the news:


Companies Need to Prepare for Big Tax ChangesForbes, read post by KPMG's Joe Pari and Ron Dabrowski | October 3, 2106

Joe Pari

Read KPMG's Joe Pari on the U.S. Proposed Section 385 Regs | September 7, 2016

Joe answers questions on Thomson Reuters Tax & Accounting blog about reactions to the proposed regulations and how companies are preparing now for final regulations.

Read Many Business Leaders Believe Proposed Debt-Equity Rules Would Impact Companies More than BEPS, Says KPMG SurveyJoe Pari from KPMG's Washington National Tax practice noted, "Taxpayers need to be preparing now for the potential for the new rules to take effect, with significant impact expected possibly as early as a matter of months from now." (June 30, 2016 press release)

Read Conversations: Corwin Reflects on Debt-Euity Regs, His Time at IRS, an interview by Amy Elliott in Tax Notes, published by Tax Analysts on June 13, 2016.

In print:


Essentials of the Section 385 Proposed Regulations
Get the basics in this one-page overview
Proposed Section 385 Regulations and the Transfer Pricing Practitioner
International Tax Journal, CCH | September-October 2016
Partnerships and the Proposed Debt-Equity Regulations
Tax Notes, Tax Analysts | September 26, 2016

Disruptors in the Global Tax Landscape, the proposed section 385 regulations are among the top-of-mind challenges facing tax executives (Spring and summer 2016 survey results)

TaxNewsFlash alerts:


  • October 11 | Section 385 Update: Hatch Letter to Treasury regarding Regulatory Process | Read
  • October 6 | Section 385 Update: Treasury's Regulatory Guidance Process | Read
  • October 5 | Section 385 Update: Ways and Means Republican's Letter to Adminstration | Read
  • September 30 | Section 385 Update: Debt-Equity Regulations Advance Towards Finalization | Read 
  • September 14 | Brady Asks Treasury to Slow Down Section 385 Regulations | Read
  • August 22 | Tax Committee Chairmen Seeking Changes to Section 385 Proposed Regulations | Read
  • July 5 | Tax-writing Committees to Question Treasury Officials, Section 385 Proposed Regulations | Read 
  • June 28 | Ways and Mean Concerns about Section 385 Proposed Regulations | Read
  • April 6 | KPMG Reports: Initial Analyses of Regulations on Inversions and on Debt-Equity |Read
  • April 4 | Regulations: "Inversions" and Earning Stripping; New Business Tax Reform Framework | Read

Webcast replays:

  • June 13 | Potential Tax Implications of Section 385 Regulations on the Financial Services Industry | Replay
  • May 26 | Tax Implications of Section 385 Regulations on U.S. Inbound Companies | Replay
  • May 24 | Section 385 -- The New Frontier | Tax Governance Institute video webcast | Replay | Press Release
  • May 12 | Section 385 Regulations: Cash Pooling and Treasury Center Implications | TaxWatch webcast | Replay 
  • April 21 | Section 385 Regulations: Transforming the World of Cross-Border Corporate Income Tax? | TaxWatch webcast | Replay | Download presentation