5 pitfalls in restructuring of a small business
Six loans intercompany restructuring strategies.
Large multinational multinational companies often fund operating expenses and capital of their overseas subsidiaries through intercompany loans Because of the crisis in the credit market and the liquidity crunch, multinational companies considering restructuring or renegotiation of intercompany loans to repatriate cash and obtain tax efficiency While the current shortage of credit and the availability of capital means that companies should benefit from factoring a liquidity premium when the prices of their intercompany lending , loans characterization continues to be a thorny issue.
Here are six key questions companies should consider when restructuring of intercompany loans.
1 arouse interest on intercompany loans is compatible with the standard arm Under Treas Reg 1 482-2 length a, the rate of interest on intercompany loans should be compatible with the standard arm length While companies often resort the refuge provision, which uses the applicable federal rate for the calculation of interest rates, this approach fails to capture the true credit risk associated with the subsidiaries the liquidity premium premium and the risk of failure associated with that depend on the maturity or duration of the loan must be properly considered as a result, the credit risk present in the operations of loan can not be captured accurately in current market conditions without considering carefully the effect of a liquidity constraint economy would have on the pricing of loans of various maturities.
2 Know that new loans negotiated can come with unfavorable interest rates and stringent financial covenants in the past, usually companies refinanced loans to get better interest rates and covenants relaxed The current economy has prompted companies to restructure debt for different reasons, such as avoiding bankruptcy or management of many companies cash flow problems have found that new loans negotiated charge higher interest rates and stricter conditions.
3 Carefully document renegotiated terms and loan conditions updated periodically to reflect market exchange Taxpayers should carefully document all the terms and conditions of the loan not only the interest rate are taken into account appropriately by eg loans allow the borrower to prepay the loan without penalty tax authorities questioned this option if the borrower does not exercise this term, even when favorable rates are available.
4 Consider all the hardware features of the loan when undertaking a comparative analysis Under Treas Reg 1 482-2 has a length interest rates arm should reflect the interest rate on loans between unrelated parties with similar terms, including standing duration and credit borrower While the borrower's credit rating was the most critical factor in the interest rate on a loan, it is essential that other loan characteristics evaluated include term, the denomination of the currency, the level of subordination, oversize and other embedded options, such as pre -options payment.
5 Do your homework to determine the debt to the loan restructuring actions characterization leads to questions on thin capitalization, debt relative to the characterization of capital and interest deductibility When considering restructuring a loan which involves a US borrower, taxpayers should consider the rules under section 385, which authorizes the Treasury Department to issue regulations to determine whether an instrument is debt or equity This classification is a fundamental question for the purposes of tax on federal income and transfer pricing as the taxation of interest payments and dividend distributions differs Although Regulation Treasury originally issued under section 385, he withdrew later them in the absence of regulatory guidelines, characterization of an instrument as debt or equity is determined primarily by reference to case law over the years, US courts have developed the factors they use to characterize an obligation debt or equity for tax purposes for US federal income; these are generally in line with Article 385, however, the case law in this area is complex and it is difficult to determine with certainty whether a particular court would characterize a given instrument as debt or equity for tax purposes US federal income.
6 Consider the steps that will be the most accurate indicators of the borrower's ability to pay interest charges to the ability of a company to take on additional debt can be assessed in several ways assessment may include debt company equity and interest coverage ratio; if the borrower has a high percentage of intangibles and goodwill included in its balance sheet; and the borrower s profitability, operational structure or expansion strategy.
Six loans restructuring strategies intercompany EY, strategies, restructuring, intercompany loans.