The IRS issued cross-border interest apportionment final regulations.  These adopt the approach from the 2012 temporary regulations, requiring a 10% corporate partner to apportion its interest expense by reference to the value of the partnership’s assets.  Thus, regardless of special allocations in the partnership, a 20% corporate partner would be treated as owning a straight 20% of the partnership assets for purposes of determining how the corporate partner apportions its interest expense for Section 861 US vs. non-US sourcing calculations.  The regulations conform to the “asset method” dictated by the 2010 statutory changes to Section 864(e).

Specifically, a corporate partner shall apportion its interest expense, including the partner’s distributive share of partnership interest expense, by reference to the partner’s assets, including the partner’s pro rata share of partnership assets, if the corporate partner’s direct and indirect interest in the partnership (as determined under the attribution rules of section 318) is 10 percent or more.  Further, an individual partner is subject to the rules if either the individual is a general partner or the individual’s direct and indirect interest (as determined under the attribution rules of section 318) in the partnership is 10 percent or more.  The regulations are effective on July 16, 2014.