Treasury issues inversion regulations
INSIGHT ARTICLE |
The Treasury and IRS recently issued temporary and proposed regulations to address corporate inversion transactions. While U.S. businesses often expand operations through combinations with foreign companies, a company that inverts and changes its tax residence to a foreign country may achieve significant U.S. tax benefits.
Despite the Internal Revenue Code limiting the tax benefits of certain inversions, several recent high-profile transactions have shed light on how corporations have structured acquisitions in order to circumvent existing law. In the absence of legislation, the Treasury and IRS have issued a series of notices to address various aspects of corporate inversion transactions, and the recent regulations formalize prior guidance and would provide additional rules.
The new rules address certain inversions that occur over time (serial inversions) and also provide broad rules that would allow the IRS to recharacterize debt as equity, which would limit the benefits of post-inversion planning.
Treasury Secretary Jacob J. Lew continues to urge Congress to enact broad anti-inversion legislation that stops inversions because the Treasury has very limited authority to curtail inversions on its own.
The business community and former government officials have criticized the Treasury's piecemeal approach to inversions. For example, in a letter to Secretary Lew, former Treasury Secretary George P. Shultz claims the Treasury's course of action has chilled investments in the United States by adding uncertainty, bypassed the legislative process, and diverted resources away from urging Congress to pass new inversion legislation.
Given the current congressional focus on elections, no inversion legislation is likely to be passed this year. If you are contemplating international merger and acquisition transactions, you should carefully consider the potential impact of the new regulations on your structures.