US Inbound: New Treasury regulations could affect foreign acquisitions of US corporations

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

US Inbound: New Treasury regulations could affect foreign acquisitions of US corporations

fuller.jpg

forst.jpg

Jim Fuller


David Forst

The US Treasury Department issued new regulations under the Code section 7874 (the "anti-inversion" rules) that could affect foreign acquisitions of US corporations. Thus, although discussed in this issue's outbound column, there also are important inbound issues under the new regulations. The anti-inversion rules are intended to prevent US corporations from reorganising (inverting) as foreign parent corporations. Among other things, if at least 80% of the new foreign parent's stock is held by shareholders of the former domestic parent by reason of holding such stock, then the new foreign parent is treated as a domestic corporation.

Under Section 7874(c)(2)(B) (statutory public offering rule), stock of the foreign acquiring corporation that is sold in a public offering related to the acquisition is not taken into account for purposes of calculating the ownership percentage. The statutory public offering rule furthers the policy that Section 7874 is intended to curtail inversion transactions that "permit corporations and other entities to continue to conduct business in the same manner as they did prior to the inversion".

This rule was modified by Notice 2009-78 which provides that the issuance of stock of a foreign corporation for cash or other "non-qualified property" in any transaction (not just a public offering) that is related to the acquisition is not to be taken into account in calculating the ownership percentage.

This can present issues in a purely foreign acquisition of a US company, where, for example, the foreign company capitalises a new foreign subsidiary with cash to effect the acquisition, and executives of the US target company receive some stock of the acquiring company.

In adopting the rules announced in the Notice, the IRS made certain modifications. The new regulations institute what is termed the "exclusion rule." Under this rule, subject to a de minimis exception, "disqualified stock" is excluded from the denominator of the ownership fraction. Disqualified stock is generally stock issued for cash, marketable securities, and in a new category – an obligation owed by a member of the expanded affiliated group that includes the foreign acquiring corporation, a former shareholder or partner of the domestic entity and certain persons related to the above. The use of foreign acquirer stock in the satisfaction or assumption of an obligation of the transferor is treated similarly as if the foreign acquirer stock was received in exchange for non-qualified property. Further, disqualified stock also includes stock that the transferee subsequently exchanges for the satisfaction or assumption of a liability associated with the property exchanged.

The regulations also state that disqualified stock does not include stock transferred in an exchange that does not increase the fair market value of the net assets of the foreign acquiring corporation (with hook stock excluded from this exception).

The regulations add an important de minimis rule that can be helpful and was not provided in the Notice. This rule provides that stock is not treated as disqualified stock if the ownership percentage determined without regard to the disqualified stock rule is less than 5%, and after the acquisition and all related transactions are completed, former shareholders in the aggregate own less than 5% of the stock of any member of the expanded affiliated group that includes the foreign acquiring corporation.

This rule is intended to mitigate the effects of predominantly cash acquisitions by foreign companies of the domestic target entity effected through a cash infusion of the foreign acquirer as described above. However, the 5% could serve as a constraining limitation in certain cases, and perhaps should be higher.

Jim Fuller (jpfuller@fenwick.com)

Tel: +1 650 335 7205

David Forst (dforst@fenwick.com)

Tel: +1 650 335 7274

Fenwick & West

Website: www.fenwick.com

more across site & shared bottom lb ros

More from across our site

Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Rafael Tena tells ITR about the ‘crazy’ Mexican market, ditching the hourly rate, and refusing to grow his fledgling firm in an ‘unstructured way’
It should be easy for advisers to be transparent about costs, Brown Rudnick partner Matthew Sharp said in response to exclusive ITR in-house data
The sprawling legislation phases out Joe Biden-era green tax incentives for businesses; in other news, the UK will reportedly maintain its DST despite US pressure
Gift this article