Treasury Makes Room for Pooling

“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 Treasury said in its Oct. 13 announcement of the final version of the rules.

The Treasury’s rules were designed to discourage U.S. companies that have undergone inversions from using earnings stripping, in which the foreign parent of a U.S.-based company makes a loan to the U.S. unit, which then deducts the interest payments it makes on that loan on its taxes. The rules allow the Internal Revenue Service to treat related-party debt as part equity and part debt, limiting companies’ ability to deduct their interest payments.