– Today, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) issued a notice that takes additional steps to reduce the tax benefits of – and when possible, stop – corporate inversions. U.S. companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes, without making significant changes in the nature of their overall operations. Last year, Treasury took targeted steps
to address this issue, and this notice identifies additional ways to reduce the incentives to invert.
“Last year, Treasury took targeted action to address inversions. This notice made a real difference by reducing some of the economic benefits of inversions, resulting in a decline in the pace of these transactions,” said Treasury Secretary Jacob J. Lew. “This next action makes it even harder to invert, and further reduces the tax benefits for U.S. companies. While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions. Only legislation can decisively stop inversions. The Administration has been working with Congress in an effort to reform our business tax system and address the issue of corporate inversions.”
Genuine cross-border mergers make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the United States. But these transactions should be driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of a parent entity to a low-tax jurisdiction simply to avoid U.S. taxes.
Specifically, today’s notice makes it more difficult for U.S. companies to undertake a corporate inversion by (1) limiting the ability of U.S. companies to combine with foreign entities using a new foreign parent located in a “third country,” (2) limiting the ability of U.S. companies to inflate the new foreign parent corporation’s size and therefore avoid the 80-percent ownership rule, and (3) requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized. This third requirement will need to be met in order to satisfy the current rule that at least 25 percent of the new entity’s business activity is in the home country of the new foreign parent. These actions apply to deals closed today or after today.
Additionally, the notice reduces the tax benefits of inversions by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent after an inversion transaction without paying current U.S. tax. These actions apply to inversions completed on or after September 22, 2014.
Lastly, today’s notice makes some corrections to last year’s action, Notice 2014-52
. Today’s notice corrects the “cash box” rule to ensure that assets used in an active insurance business are not treated as passive assets. It also corrects the rule that would disregard certain extraordinary dividends for purposes of the ownership requirement to ensure that the rule does not apply when a U.S. company is acquired in an all-cash, or mostly all-cash, acquisition.
Treasury is actively working on the guidance announced in the first inversion notice released on September 22, 2014, and expects to issue those regulations in the coming months. Treasury will also continue to examine additional ways to reduce the tax benefits of inversions, including guidance to address earnings stripping. Today’s notice requests comments on additional ways that Treasury can make inversion deals less economically appealing.