The Obama administration on November 19 issued another package of tax measures designed to make it more difficult and less profitable for US companies to invert.
The guidance, Notice 2015-79, supplements measures announced in Notice 2014-52, issued September 22, 2014, which are also designed to make inversions less attractive.
And, according to Treasury Secretary Jacob J. Lew, the goverment is not done yet.
“This is an important step, but it is not the end of our work. We continue to explore additional ways to address inversions – including potential guidance on earnings stripping – and we intend to take further action in the coming months,” Lew said.
Lew also said that while the actions taken will make inversions less appealing, “there are limits to what we can do administratively, which is why it is incumbent upon Congress to pass anti-inversion legislation when they return in November.”
The notice states that the IRS will issue regulations under section 7874 providing that for a US company to use the substantial business activities exception, after the transaction not only must at least 25 percent of the combined group’s business activity be in the foreign country in which the foreign acquiring corporation is created or organized, but the foreign acquiring corporation must also be tax resident there.
“Allowing the exception to apply when the foreign acquiring corporation is not subject to tax as a resident of the relevant foreign country effectively permits an [expanded affiliated group that includes the foreign acquiring corporation (EAG)] to replace its US tax residence with tax residence in any other country (or, in certain cases, in no other country), without regard to the location of any substantial business activities conducted by the EAG . . . contrary to the policy underlying the substantial business activities test,” the Service said.
The IRS said in the notice that it will also issue regulations under section 7874 to limit the ability of US companies to combine with foreign entities when the new foreign parent is located in a “third country.” Planning using third countries is usually done to facilitate US tax avoidance after an inversion transaction, the Service said.
In certain cases where the foreign parent is a tax resident of a third country, stock of the foreign parent issued to the shareholders of the existing foreign corporation will be disregarded for purposes of the ownership requirement, thereby raising the ownership attributable to the shareholders of the US entity, possibly above the 80-percent threshold, the Service said in the notice.
Other regulations will limit the ability of US companies to stuff assets into the new foreign parent corporation to increase its size and therefore avoid the 80-percent ownership rule. The notice clarifies that the anti-stuffing rules do not only apply to passive assets.
Further, the notice states that regulations will expand amount of inversion gain for which current US tax must be paid to include certain taxable deemed dividends recognized by an inverted company attributable to passive income recognized by a controlled foreign corporation (CFC) when the CFC transfers foreign operations to the new foreign parent.
Regulations will also be issued under section 367 that will require that all built-in gain in CFC stock to be recognized, without regard to the amount of deferred earnings, upon a restructuring of the CFC. The rule will potentially increase the amount of current US tax paid as a result of the transfer, the Service said.
The notice also includes corrections to Notice 2014-52.
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