United States: First Shoe Drops For Corporate Inversions

Notice 2014-52, released by the US Treasury Department on September 22, 2014, is intended to disrupt, and in some cases prevent, so-called corporate inversion transactions that have not been completed prior to the notice's release. Although the notice includes very detailed rules, it very generally takes a two-pronged approach to discourage inversions after September 21, 2014.

Background on US "anti-inversion" rules

Internal Revenue Code ("Code") section 7874, enacted as part of the American Jobs Creation Act of 2004, subjects expatriated entities (and their affiliates) to adverse US tax consequences. Generally, if a US company transfers its properties to a foreign corporation and at least 80 percent of the stock (by vote or value) of the new foreign parent company is held by former shareholders of the US company, then the new foreign parent company (the "surrogate foreign corporation") will be subject to US tax as though it were a US corporation, notwithstanding its foreign incorporation. If at least 60 percent (but less than 80 percent) of the stock (by vote or value) of the new foreign parent company is held by former shareholders of the US company, then the foreign status of the surrogate foreign corporation is respected for US tax purposes, but any gain on the inversion transaction is generally subject to US income tax, notwithstanding any exclusions, exemptions and credits (other than the foreign tax credit) that would otherwise reduce the US tax on the inversion gain. These anti-inversion rules apply only if, after the acquisition, the surrogate foreign corporation and its subsidiaries (the "expanded affiliated group") do not have "substantial business activities" in the surrogate foreign corporation's home country, compared to the total business activities of the expanded affiliated group. Temporary regulations issued in June 2012 made this "substantial business activities" test harder to meet. See " IRS Clarifies and Tightens New "Anti‑Inversion" Regulations."

Two-pronged approach of Notice 2014-52

First, the notice announces three changes to the regulations under section 7874, the basic anti-inversion rule in the Code. These changes are intended to cause more transactions to be caught by the adverse rules of section 7874. The changes would prevent would-be inverters from

  • Using a foreign "cash box" to ensure that the foreign partner in the acquisition is large enough to avoid crossing the 60% or 80% thresholds of section 7874;
  • "Skinnying down" a domestic corporation by making distributions prior to the transaction to avoid exceeding the 60% or 80% thresholds of section 7874 or the adverse rules of section 367; and
  • Undertaking a "spinversion" where a company transfers a portion of its assets to a newly-formed foreign corporation and then spins off that foreign corporation to its shareholders.

Note that the newly-announced rules do not require the parties to have taken the proscribed actions with the intent of avoiding section 7874. The notice conclusively presumes that the "skinnying down" limitation applies to distributions above 110% of the preceding 3-year average. The limitations on foreign corporate "cash boxes" applies to any foreign corporation holding foreign passive assets that exceed a 50% threshold.

Second, the notice expands the US tax net to catch four types of transactions:

  • Applying a new "hopscotch" rule under section 956 to tax loans made by a foreign subsidiary to the new foreign parent company created by an inversion;
  • Using authority under section 7701(l) to re-characterize transactions that seek to "decontrol" a controlled foreign corporation ("CFC") following an inversion transaction by transferring it so that it lacks sufficient US ownership to continue to be treated as a CFC; and
  • Subjecting certain post-inversion transfers of CFC stock to new rules under section 367(b) so that they are subject to US tax; and
  • Subjecting certain transfers of foreign or domestic corporations to greater US tax under section 304 where the section 304 dividend would otherwise escape the US tax net.

Effective Date

The first set of changes apply only to acquisitions on or after September 22, 2014. For the second set of changes, the new rules for section 956, section 7701(l), and section 367(b) apply only to transactions that involve an inversion transaction that has occurred on or after September 22, 2014. The new rules under section 304, however, apply to acquisitions of stock completed on or after September 22, 2014, regardless of whether an inversion transaction has occurred.

Effect of Notice 2014-52 on potential transactions

The first set of changes--dealing with skinnying down the US company or bulking up the foreign corporation or so-called "spinversions"--could cause a transaction that was structured to be below the 80% or 60% thresholds of section 7874 now to exceed those thresholds. In that case, revisions to the planned transaction are necessary. The second set of changes--the new rules under sections 956, 7701(l), 367(b), and 304--can affect the planned economics of an inversion transaction and therefore cause one to re-think at least features of any transaction on the drawing board. Despite the goal of the notice, however, few if any companies have stated their intent to abandon any previously announced transactions. Tax advantages still remain after an inversion transaction with respect to the ability to make future non-US investments outside of the US tax net. Although the US Treasury Department is likely to propose additional rules that prevent reducing the US tax base, these potential changes would not affect new foreign businesses that would be owned by the surrogate foreign corporation that are commenced after an inversion transaction. Thus, if the proposed inversion transaction has compelling economic advantages apart from unlocking US tax benefits related to "trapped CFC cash," the proposed transaction will likely proceed.


Companies that are considering a cross-border acquisition or merger need to take a close look at the notice to see how it affects transactions they were considering. Moreover, because the new section 304 rules apply irrespective of whether an inversion has occurred, even those companies that have no inversion plans at all should take into account how those new rules will affect them.

Even though the US Treasury Department describes Notice 2014-52 as the first step of regulatory action, the issuance of the notice effectively shifts pressure from the Obama Administration back to Congress regarding next steps. Indeed, by issuing a notice that includes so many technical provisions, the Administration may have done as much as it can to disrupt potential transactions, considering its limited options. Even though the spotlight may be back on Congress on this issue, it is difficult to see Congress agreeing on a legislative proposal in 2014. So, companies likely will have to continue to make decisions unsure as to whether (or when) current law will be changed.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
6 Dec 2017, Webinar, New York, United States

Join Dentons for a complimentary webinar focused on the ongoing challenge of integrating new technologies into existing information governance policies and risk management frameworks.

24 Jan 2018, Seminar, San Francisco, United States

Dentons will host our Fourth Annual Courageous Counsel Leadership Institute in January, centered on the theme "Cultivating Innovation."

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.