During recent months there has been a surge in cross-border
M&A activity in which U.S. and non-U.S. companies combine in
so-called inversion transactions. Examples of these transactions
are Endo International's acquisition of Canadian-based Paladin
Labs (February 2014), Perrigo Company's acquisition of
Ireland-based Elan Corporation (December 2013), the combination of
Liberty Global and Virgin Media (June 2013) and Pfizer Inc.'s
recently announced $98.7 billion bid to take over U.K-based
AstraZeneca. While the parties emphasize the strong non-tax
business drivers for these deals, it is apparent that these
transactions are also carefully structured to allow the U.S.
corporation to essentially expatriate to a non-U.S. jurisdiction
(and thereby reduce its effective U.S. tax burden on future
income). As this wave of inversion transactions gathers momentum,
there will be greater pressure on the United States Congress to
take action to stem this outflow. The perception that the U.S.
anti-inversion rules may be amended has, in turn, created a sense
of urgency on the part of U.S. corporations, including some that
may be experiencing market pressures to follow the footsteps of
their competitors that have already inverted. As discussed below,
Canada's legal and tax system may make it an attractive
jurisdiction for the parent corporation in an inversion
In general, an "inversion" is a transaction in which a
U.S. parent corporation is structurally inverted so that it becomes
a subsidiary of a non-U.S. parent corporation. Once the U.S.
corporation has expatriated in this manner, it is positioned to
engage in cross-border tax planning that can dramatically reduce
the U.S. corporation's effective U.S. tax rate. The precise
nature of this planning depends on the facts of each case but, in
many cases, it will parallel the tax planning customarily used by
foreign-based multinationals to reduce the U.S. tax burden of their
own U.S. subsidiaries. This can include increasing the amount of
leverage carried by the U.S. corporation; migrating intangible
property offshore; and efficiently accessing foreign earnings that
may have effectively been trapped offshore before the
Although inversion transactions may be structured in several
alternative ways, progressive tightening of the U.S. anti-inversion
rules in recent years has severely restricted the scenarios in
which an inversion may be achieved from a tax perspective.
Inversions remain possible, however, as part of a merger between a
U.S. corporation and a non-U.S. operating corporation in which the
resulting parent corporation is formed outside the U.S. In general,
such an inversion may be viable under current rules as long as the
combination is primarily motivated by business synergies (as
opposed to the desire to reduce taxes), the former shareholders of
the U.S. company end up owning less than 80% of the resulting
corporation, and certain other requirements are met.
To date, most of the recently reported inversion deals have
involved large publicly traded corporations, predominantly in the
pharmaceutical sector. However, there is emerging interest in these
transactions among smaller companies in a more diverse range of
industries. Since the opportunities associated with inversion
transactions are not strictly limited to particular industries or
to large-cap companies, it is reasonable to expect this trend to
continue with further transactions in the middle market and/or
private company space. In addition, because of appealing attributes
of the Canadian legal system (such as Canada's extensive tax
treaty network, exempt surplus regime and sophisticated corporate
law); it is likely that Canadian corporations will be combined with
U.S. corporations in these inversion transactions.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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