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Attorneys Review Proposed Tax Regulations Concerning Alternative Reference Rates

Cadwalader attorneys reviewed recently proposed regulations confirming that transitions from the London Interbank Offered Rate ("LIBOR") and other interbank offered rates ("IBORs") to alternative reference rates in debt instruments and derivatives will not be taxable events.

According to the attorneys, the highly anticipated guidance clarifies countless instruments that must be amended to provide for new reference rates prior to the phasing out of IBORs.

Under the proposed regulations, the modification of an instrument to replace an IBOR-based rate with a Secured Overnight Financing Rate-based or other qualified replacement rate will not be treated as a "modification" for U.S. tax purposes and, thus, will not give rise to a taxable event, if (i) the fair market value of the modified instrument is substantially equivalent to the fair market value of the unmodified instrument and (ii) the replacement rate is based on transactions conducted in the same currency as the IBOR-based rate or is otherwise reasonably expected to measure contemporaneous variations in the cost of newly borrowed funds in the same currency as the IBOR-based rate.

This memorandum was published in Cadwalader's BrassTax newsletter.

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