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IRS Issues New Anti-inversion Rules
Practical Law Legal Update 2-582-2266 (Approx. 4 pages)
IRS Issues New Anti-inversion Rules
by Practical Law Tax
| Published on 23 Sep 2014 • United Kingdom, USA (National/Federal) |
The Treasury Department and IRS released a Notice with new anti-inversion rules for deals closed on or after September 22, 2014.
On September 22, 2014, the Treasury Department and IRS released Notice 2014-52 (the Notice) announcing regulations that they intend to issue to make it more difficult for US companies to invert and to reduce the tax benefits of corporate inversions. These new anti-inversion rules apply to deals closed on or after September 22, 2014.
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 a corporate 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. 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.
The new regulations will make it more difficult for US companies to invert by strengthening the test for determining whether the former owners of the US company own less than 80% of the new foreign parent. In particular, the new regulations will:
- Exclude a portion of the foreign acquiror's stock from the determination of the post-acquisition ownership percentage if more than 50% of the gross value of the foreign acquiror's assets are passive assets. This limits the ability of US companies to evade the 80% rule by counting passive assets that are not part of the foreign acquiror's daily business functions to inflate the new foreign acquiror's size (commonly referred to as using a "cash box"). Banks and other financial services companies are exempted.
- Disregard "extraordinary dividends" paid by the US company to reduce its size before an inversion.
- Prevent the use of certain types of "spinversions" to evade the anti-inversion rules.
The new regulations will also eliminate certain techniques that inverted companies currently use to access the overseas earnings of their controlled foreign corporations (CFCs) without paying US tax. Specifically, the new regulations will prevent inverted companies from:
- Accessing a CFC's earnings while deferring US tax through the use of "hopscotch" loans (generally, a loan from the CFC to the new foreign parent, instead of its US parent).
- Restructuring a CFC in a tax-free "de-controlling" transaction so that it is no longer a CFC. In this type of transaction, the new foreign parent buys enough stock to take control of the CFC from the former US parent so that the US stockholders can access the earnings of the former CFC without the imposition of US tax.
- Using related party stock sales to facilitate a tax-free repatriation of a CFC's earnings. Before the Notice, a new foreign parent could sell its stock in the former US parent to a CFC with deferred earnings in exchange for cash or property of the CFC to facilitate a tax-free repatriation of the CFC's earnings.
The Notice states that the Treasury Department and the IRS expect to issue additional guidance to further limit inversion transactions that are contrary to the purposes of IRC Section 7874 and the benefits of post-inversion tax avoidance transactions. In particular, the Treasury Department and the IRS are considering 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.