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US Inbound: Anti-inversion Bills and inbound acquisitions

Jim Fuller
David Forst
We recently discussed some changes in the IRS's § 7874 anti-inversion regulations and the Obama Administration's 2015 anti-inversion Budget proposals insofar as how they could affect inbound acquisitions even though the transaction may have nothing to do with inversions.

Two virtually identical anti-inversion Bills have now been introduced in Congress, one in the Senate (S. 2360) and the other in the House (H.R. 4679). They are patterned on the Obama Administration's Budget proposals. Interestingly, the Senate Bill has 20 sponsors (all Democrats). Republicans have strongly expressed the view that tightening the anti-inversion rules is not the right way to limit inversions, but rather that addressing corporate tax reform is the far better approach. Thus, the prospects for enactment are, at best, uncertain.

The Bills nonetheless could be important in considering inbound acquisitions. They have effective dates retroactive to May 9 2014. Under the Bills, the § 7874 80% inversion threshold would be reduced to "more than 50%". That is, if more than 50% of the foreign acquirer's shareholders after the acquisition were previously shareholders of the US target and received their stock in the acquirer by reason of having owned stock in the target, then the foreign acquirer would be treated as a US corporation for US tax purposes (with a same-country exception we will not discuss here).

This would effectively end a US company's ability to invert by engaging in an acquisition transaction with a smaller foreign company.

It also would have important consequences for the foreign acquiring company in an acquisition unrelated to inversions: it would become a US corporation for US tax purposes. If the well-known Daimler-Chrysler transaction had been done under these Bills, and at close Chrysler's shareholders received more than 50% of Daimler's shares, Daimler, a large German operating company, would have become a US corporation for US tax purposes, and its non-US subsidiaries would have become controlled foreign corporations (CFCs).

Perhaps more importantly from an inbound acquisition perspective, the 80% drops to 0% under the Bills if, after the acquisition, the management and control of the foreign acquirer's worldwide group (its "expanded affiliated group") is primarily in the US and the group has significant US business activities. In this case, the foreign acquiring company can become subject to these rules, and find that it has become a US corporation for US tax purposes, even if the transaction is effected simply as a cash acquisition of the US target and no target shareholders have become shareholders in acquiring in the transaction.

The management and control of a foreign acquirer's expanded affiliated group is treated under the Bills as occurring, directly or indirectly, primarily within the US if substantially all of the executive officers and senior management of the group who exercise day-to-day responsibility for making strategic, operating and financial decisions are based or primarily located in the US.

An expanded affiliated group has significant US business activities if at least 25% of its (1) employees (by headcount); (2) employees (by compensation); (3) tangible assets; or (4) income is in the US. Treasury and the IRS can decrease this percentage by regulations.

A § 7874 transaction also can occur when a foreign company acquires a US partnership. Under the Bills, the same "more than 50%" rule would apply. So could the 0% rule. Assume the foreign corporation acquires a US partnership for cash. The foreign corporate partner (or now the owner of a disregarded entity) would be treated as a US corporation for tax purposes if its primary management and control is in the US and it has significant US business activities.

Today's § 7874 requires the acquisition of substantially all the partnership's properties constituting a trade or business of the partnership. The Bills would add "substantially all the assets" of the partnership, without regard to whether the assets are used in a trade or business.

While the Bills may or may not become law, the retroactive effective date and surprisingly strong Democratic support for the Senate Bill (20 co-sponsors) can leave one a bit uncomfortable.

Jim Fuller ( and David Forst (
Fenwick & West
Tel: +1 650 335 7205; +1 650 335 7274

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