US Outbound: Treasury Department releases new anti-inversion rules
The US Treasury Department and Internal Revenue Service (IRS) recently announced their intention to issue extensive regulations aimed at reducing the tax benefits of corporate inversions. According to the Treasury Department press release, Notice 2014-52 (the Notice) "takes targeted action to reduce the tax benefits of – and when possible, stop – corporate inversions". The Notice follows up on inversion regulations that were previously issued in January 2014. For more detail on those regulations, see our February 2014 column, New Anti-inversion regulations address use of disqualified stock. The new regulations described in the Notice are generally applicable to inversion transactions completed on or after September 22 2014. The regulations described in the Notice take two tacks in addressing inversion transactions. The first set of regulations described would broaden the scope of section 7874 to make it more difficult for US companies to implement corporate inversions. The second set of regulations would limit the ability of a post-inversion foreign parent to access cash from the US company's controlled foreign corporations (CFCs) in a tax-efficient manner.
With regard to broadening the scope of section 7874, the Notice provides for three sets of regulations. First, for the purposes of calculating the ownership percentage requirements of section 7874, stock of a foreign acquiring corporation attributable to passive assets will be disregarded if at least 50% of the foreign group's assets are passive assets. The Notice provides an exemption for banks and certain other financial institutions. Second, non-ordinary course distributions made by a US company before an inversion will also be disregarded for the purposes of calculating the ownership percentage requirements of section 7874. The Notice defines non-ordinary course distributions as distributions in excess of 110% of the average of such distributions over the preceding 36 months. Such distributions may be in the form of either taxable or tax-free distributions (such as spin-offs). Third, the Notice provides that section 7874 will apply to the formation of a foreign subsidiary in certain spin-off transactions.
With regard to limiting a post-inversion foreign parent's ability to access CFC cash, the Notice provides for three more sets of regulations. First, certain "hopscotch" transactions in which a CFC loans funds to (or invests equity in) the new foreign parent will be treated as if the CFC had instead made the loan to (or invested the equity in) the former US parent. As a result, these "hopscotch" transactions would be treated as deemed dividends to the former US parent under section 956. Second, certain investments by the new foreign parent in a CFC that would cause the CFC to not be treated as a CFC (through dilution of US ownership) would instead be treated as if the former US parent made the investment through a multi-party financing arrangement with the new foreign parent. As a result, the CFC would remain a CFC, with its earnings and profits subject to subpart F of the Internal Revenue Code. Third, the Notice provides that additional rules under section 304(b)(5) would apply to provide for full US taxation when a new foreign parent sells the stock of the former US parent to a CFC in a section 304 transaction giving rise to a deemed dividend from the CFC to the foreign parent.
The Notice also states that the Treasury Department and the IRS intend to issue additional guidance to further limit inversion transactions and the benefits of post-inversion tax avoidance transactions. In particular, the Treasury Department and the IRS are considering guidance that would limit the tax benefits of shifting US-sourced earnings into lower-taxed jurisdictions through intercompany debt. According to the Notice, such guidance would generally apply prospectively. However, if such guidance applies to inverted groups only, the guidance will apply to inverted groups that inverted on or after September 22 2014, the effective date of the Notice.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
This article represents the views of the authors only, and does not necessarily represent the views or professional advice of KPMG LLP.
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