In September 2014 and November 2015, the IRS released guidance that made it more difficult for US companies to invert and reduced the tax benefits of inversions (see Legal Updates, IRS Issues Additional Anti-inversion Guidance and IRS Issues New Anti-Inversion Rules). On April 4, 2016, the IRS issued new temporary and proposed regulations that further reduce the benefits of and limit the number of inversions, including by addressing earnings stripping. Because of these new rules, Pfizer Inc. and Allergan plc terminated their planned $160 billion inversion (see What's Market, Allergan plc/Pfizer Inc. Merger Agreement Summary). If the Pfizer/Allergan inversion had been completed, it would have been the biggest inversion in US history.

IRC Section 7874 was enacted to prevent a corporate group with a US parent from restructuring so that a foreign corporation in a jurisdiction with more favorable tax rules becomes the parent of the group (referred to as an inversion). If the former stockholders of the US company own at least 80% of the new foreign parent, IRC Section 7874 disregards the inversion transaction and treats the new foreign parent as a US corporation for US federal income tax purposes unless 25% or more of the new group's business activity is in the home country of the new foreign parent (the substantial business activities exception). If the former stockholders own at least 60% but less than 80% of the new foreign parent, IRC Section 7874 respects the new foreign parent for US tax purposes but certain limits are placed on the US company's use of its tax attributes (unless the substantial business activities exception is met).

The new temporary regulations will make it more difficult for US companies to invert by disregarding foreign parent stock attributable to recent prior inversions or acquisitions of US companies. This will prevent a foreign company (including a recent inverter) that acquires multiple US companies from using these transactions to increase its size to avoid the current inversion thresholds on a subsequent acquisition of a US company. This new rule applies to transactions that close on or after April 4, 2016 and is designed to curb so-called "serial inverters" (such as Allergan, which had been US-based before its own inversion).

In its prior anti-inversion guidance, the IRS stated that it intended to issue guidance to address strategies that avoid US tax on US operations by shifting or "stripping" US-source earnings to lower-tax jurisdictions, including through intercompany debt. The IRS issued new proposed regulations that extend well beyond the inversion context and address the issue of earnings stripping by:

These proposed regulations apply to instruments issued after April 4, 2016.

Finally, the IRS issued temporary regulations implementing the anti-inversion guidance released in September 2014 and November 2015. These temporary regulations also include new rules (in addition to the new rule described above) that disregard foreign parent stock attributable to prior inversions or acquisitions of US companies. The new rules: