New inversion guidance makes inversions less attractive
Businesses that invert may recognize more gain than expected
TAX ALERT |
On Nov. 19, 2015, the U.S. Treasury Department issued Notice 2015-79, which announces that regulations will be issued to (1) clarify the situations in which a transaction may qualify as an inversion and (2) expand the definition of inversion gain that arises from post-inversion-related party transactions. These regulations would revise and supplement the regulations announced in Notice 2014-52. Generally speaking, under the notice, more transactions will qualify as inversions and more income recognized post-inversion will qualify as inversion gain, which gain may not be offset by net operating losses or other tax attributes.
The notice expands the scope of what qualifies as an inversion in three significant ways.
- Under existing law, the acquisition of a U.S. business by a foreign corporation does not constitute an inversion if the foreign corporation has substantial business activities in its home country. The regulations described in the notice would further require that the foreign acquiring corporation be subject to tax as a resident in its home country. For example, a foreign corporation that is not subject to tax in its home country because it is managed and controlled in another country would fail this test.
- The acquisition of a business with U.S. and foreign operations by a foreign corporation organized in a country that is other than the tax residence of the target company’s foreign tax residence could qualify as an inversion if certain other requirements are met even though the transaction does not otherwise satisfy the 80 percent stock ownership standard set forth in the inversion statute. In essence the regulations would treat old shareholders as owning a higher percentage of the foreign acquiring corporation that they actually own in order to treat the transactions as an inversion.
- The regulations described in the notice clarifies an anti-abuse rule under existing law. Under this rule, taxpayers must exclude stock acquired in exchange for certain property or cash in applying the 80 percent ownership test that must be satisfied in order for a transaction to qualify as an inversion. The notice clarifies that taxpayers must exclude any stock acquired with a principal purpose of avoiding the inversion rules in applying the 80 percent test.
The notice also provides that future regulations will treat income from certain post-inversion transactions as inversion gain. Under the tax code, taxpayers that invert (and persons related to a taxpayer that inverts) must recognize inversion gain arising from a license or transfer of property that occurs during the 10-year period beginning on the date of an inversion. However, taxpayers may not offset inversion gain with net operating losses or otherwise offset the tax liability arising from such gain with other tax attributes (e.g., by using existing tax credits). The regulations described in the notice would expand the situations in which inversion gain would arise and generally would require taxpayers to recognize gain when they engage in a transaction post-inversion that would shift built-in gains or untaxed earnings and profits offshore.
The regulations described in the Notice will generally apply to transactions that occur after Nov. 19, 2015, but could also apply to inversion gain arising from inversions completed after Sept. 22, 2014. Taxpayers should immediately assess the impact of these regulations on their current reporting positions and with respect to any cross-border transactions under consideration.