Earlier this week, the Treasury Department and the IRS announced that they would issue regulations that substantially limit the U.S. tax benefits of corporate inversions (and certain post-inversion transactions). The regulations described in Notice 2014-52 and in the IRS “Fact Sheet” will make it more difficult for U.S. corporations to satisfy the ownership thresholds necessary to avoid subjecting the inverted company to continued U.S. taxation, and will also significantly impact a new foreign parent’s ability to access offshore earnings free of U.S. tax after an inversion (including through tax-free decontrol of CFCs). Specifically, the regulations will:
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Restrict inversions with foreign corporations that have substantial passive assets (including cash and marketable securities).
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Restrict the U.S. company’s ability to satisfy the applicable ownership tests by making “skinny-down” distributions (i.e., pre-inversion “extraordinary” dividends).
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Restrict the U.S. company’s ability to engage in so-called “spinversions” under the internal group restructuring exception to the inversion rules.
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Prevent inverted companies from accessing earnings of existing CFCs using “hopscotch” loans, stock sales, or de-controlling transactions (such as tax-free transfers of stock of a CFC to the new foreign parent).
While new restrictions announced in Notice 2014-52 strike a substantial blow to U.S. companies hoping to gain U.S. tax benefits from inverting, there is still more to come. Treasury has indicated that future guidance will impose further limitations on the benefits of post-inversion tax avoidance transactions as well as inversion transactions that are contrary to the purposes of Section 7874. Earnings-stripping structures (which were not targeted by Notice 2014-52) are also under consideration by Treasury and may be the subject of future guidance. Further, there are also separate legislative proposals by Sen. Schumer and Sen. Levin that target earnings-stripping structures as well as more general proposed legislation to prevent corporate inversions.
Notice 2014-52 is generally applicable to transactions completed on or after September 22, 2014. There is no grandfathering provision for signed but not yet completed transactions.
