The Obama administration has announced that it has taken regulatory action to make it more difficult and less lucrative for US companies to invert.
The new rules, which apply to deals closed on Sept. 22 or thereafter, are designed to stop post-inversion planning techniques that allow companies to use earnings from foreign subsidiaries that have had the benefit of deferral without triggering a deemed repatriation.
The rules also make it more difficult for US entities to invert by strengthening the requirement that the former owners of the US company own less than 80 percent of the new combined entity.
Specifically, Treasury said that new provisions under section 956(e) will close a loophole that allowed inverted companies to make hopscotch loans — loans from the company’s controlled foreign corporation (CFC) to the new foreign parent — without triggering tax. Such loans will be considered “US property” for purposes of applying the antiavoidance rules, and thus trigger dividend taxation, Treasury said.
New rules under section 7701(l) will prevent the post-inversion technique of “decontrolling” foreign subsidiaries. The new foreign parent will be treated as owning stock in the former US parent, rather than the CFC, to remove this benefit, Treasury said.
Treasury also said it shut down a post-inversion planning technique whereby the new foreign parent sells its stock in the former US parent to a CFC with deferred earnings in exchange for cash or property of the CFC. Treasury put an end to this transaction, which effectively resulted in a tax free repatriation, using its authority in under section 304(b)(5)(B).
New provisions under section 7874 will make it more difficult for US entities to invert by limiting the ability of companies to count passive assets to inflate the new foreign parent’s size and therefore evade the 80 percent rule, Treasury said. Further, new rules would disregard large dividends paid by the US company pre-inversion in calculating the 80 percent threshold.
New rules are also added under 7874, Treasury said, to stop “spinversions,” whereby a US entity inverts a portion of its operations by transferring assets to a newly formed foreign corporation that then spins off the corporation to its pubic shareholders.
Treasury Secretary Jacob J. Lew said the rules were only the government’s first crack at fighting inversions; “Treasury will continue to review a broad range of authorities for further anti-inversion measures,” he said.
See:
- Remarks by Treasury Secretary Jacob J. Lew on a Press Conference Call Regarding Announcement on Corporate Tax Inversion, Treasury Announces First Steps to Reduce Tax Benefits of Corporate Inversions, Fact Sheet: Treasury Actions to Rein in Corporate Tax Inversions
The IRS and Treasury on Sept. 23 published a notice which describes regulations that will be issued with respect to inversion transactions. See, Notice 2014-52.
