Certainty regarding characterization of intercompany transactions remains a priority after US tax reform, opinion highlights importance of established pattern of conduct.

On August 6, 2018, the US Tax Court decided Illinois Tool Works Inc. & Subsidiaries v. Comm’r,1 upholding the taxpayer’s characterization of a cross-border, intercompany financing transaction as a loan creating a bona fide debt obligation, and thus supporting the taxpayer’s overall international tax structure and planning.2 Illinois Tool Works is the latest volley in an argument over the characterization of related-party financial instruments that has been running between IRS and taxpayers for over 60 years, and which will likely continue. The decision is a resounding taxpayer victory, provides valuable insight with respect to the planning and execution of cross-border intercompany transactions, and serves as a reminder that the choice by multinationals to use equity or debt for cross-border, intercompany financing still matters.