IRS Increases Scrutiny of Inter-Company Debt Arrangements

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In the current economic environment, companies often finance the operational and capital expenditures of their foreign affiliates through intercompany loans. Debt restructuring can enable companies to better manage cash flow, restore liquidity, and achieve other benefits. The current economic turmoil has caused many multi-national entities to revisit their financing strategies. The IRS has always been concerned with issues of thin capitalization, debt versus equity characterization, and interest deductibility. Therefore, it is not surprising, that the Service considers intercompany movement of funds to be a potentially high-risk transaction.

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