The Treasury Department’s temporary and proposed regulations to limit inversion transactions added new rules and clarified others related to inversion notices released in 2014 and 2015, which were intended to make inversion deals more cumbersome and expensive. The regulations released April 4 are even more far-reaching, surprising Wall Street and killing what would have been the largest inversion deal ever, Pfizer’s proposed combination with Allergan.
Here are four key additions/clarifications the regulations provide:
Identify a foreign acquiring company when a domestic entity acquisition involves multiple steps (such as when a foreign firm acquires substantially all the assets of a U.S. entity, then a second foreign firm acquires most of the assets of the first foreign firm, including the initial acquisition).
Disregard stock of the foreign acquiring company that can be attributed to certain prior domestic entity acquisitions.
Require a controlled foreign corporation (CFC) to recognize gain on certain transfers of assets, described in Section 351, that shift ownership of those assets to a related foreign entity that isn’t a CFC after an inversion transaction.
Clarify the definition of group income for purposes of the substantial business activities test used when determining business activities in a foreign country.
The regulations mark the government’s latest crackdown on inversions and “serial inverters” in particular. In certain scenarios, they subtract the value of the U.S. stock a foreign company had acquired, making the foreign company “smaller.” Then, if the shareholders of the former U.S. company own at least 80% of the combined firm, the government would treat the new combined company as subject to U.S. taxes, even if the company is no longer U.S.-based. There are other potentially adverse tax consequences if the continuing ownership stake is less than 80% but at least 60%.
No doubt tax professionals have many questions and concerns about the proposed regulations, but they should make haste in expressing them. Treasury is accepting comments only through July 7.
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