United States: Treasury And IRS Issue Additional Anti-Inversion Notice

The Treasury Department and the IRS released Notice 2015-79 (the "2015 Notice") on November 19th to further limit expatriation transactions and to supplement the anti-inversion guidance issued by them on September 22, 2014 (the "2014 Notice").

The 2015 Notice states that Treasury and the IRS will issue Treasury regulations to expand the scope of Section 7874 to apply to certain transactions and to address certain post-expatriation transactions so as to limit tax benefits of expatriations. The Treasury regulations announced in the 2015 Notice generally will apply to transactions completed on or after November 19, 2015 (i.e., no grandfathering of previously announced transactions) but, in the case of Treasury regulations limiting tax benefits of expatriations, only if the expatriation transaction was completed on or after September 22, 2014 (i.e., the date of the 2014 Notice).

Generally, a corporate inversion subject to Section 7874 is a transaction where a foreign corporation acquires a US corporation (or substantially all of its assets), the shareholders of the US corporation receive 60% or more of the stock of the foreign corporation and the foreign corporation does not have 25% or more of its worldwide operations following the acquisition in its country of organization. Under Section 7874(a)(1), such an inverted US corporation cannot use pre-acquisition losses to offset gain recognized during an "applicable period" of 10 years following the inversion. Under Section 7874(b), if the shareholders of the US corporation receive 80% or more of the stock of the foreign corporation, the foreign corporation will be taxable as a US corporation.

New Third Country Rule

Section 7874 generally applies based on whether shareholders of the US corporation receive 60% or more of the stock of the foreign parent company. Section 7874 does not contain any rules that would restrict the jurisdiction of the foreign parent company.

The 2015 Notice announces new Treasury regulations preventing a US corporation and a foreign corporation from having a foreign parent company that is a tax resident of a third jurisdiction. The rule generally applies if (i) the foreign parent company is a tax resident of a different jurisdiction than the acquired foreign corporation, (ii) the shareholders of the US corporation receive at least 60% of the stock of a foreign parent company and (iii) the gross value of the acquired foreign corporation exceeds 60% of the gross value of the foreign parent company (including the acquired foreign corporation but excluding the US corporation). If the rule applies, for purposes of Section 7874, the stock of the foreign parent company received by shareholders of the acquired foreign corporation will be disregarded in determining the percentage of foreign parent company stock received by the shareholders of the US corporation. Thus, this rule can apply where (a) a US corporation and a foreign corporation combine under a new foreign parent company, or (b) an existing foreign parent company acquires both a larger foreign corporation and a larger US corporation. In addition, if a foreign parent company changes its tax residence prior to but in connection with its acquisition of a US corporation, the rule will apply to disregard the stock of the foreign parent company held by its existing shareholders.

In announcing this rule, Treasury and the IRS appear to have extended their aggressive view of their authority to issue Treasury regulations under Section 7874.

Limitation on Substantial Business Activities Exception

Section 7874 does not apply to an expatriation transaction if at least 25% of the foreign parent corporation's worldwide operations (including the acquired US corporate group) are located in its country of organization. This 25% test generally must be met with respect to the employees, sales and assets of the foreign parent corporate group.

Under US tax rules, a corporation generally is treated as tax resident of the country in which it is created or organized. Tax rules of foreign countries may have different standards for determining tax residence, such as where the corporation is managed and controlled. Thus, a foreign parent company may not be a tax resident of the country of its organization.

The 2015 Notice announces new Treasury regulations that will provide that the foreign parent company must also be a tax resident in its country of organization to satisfy the 25% substantial business activities exception. This change may have limited impact because the 25% substantial business activities exception is a significant threshold for multinational corporations to meet, and few prior expatriation transactions have qualified for this exception.

Anti-Stuffing Rules

If shareholders of the US corporation receive 80% or more of the stock of the foreign parent company, Section 7874 applies to treat the foreign parent company as a US corporation for US tax purposes.

Current Treasury regulations disregard stock of the foreign parent company that is received by other shareholders in exchange for certain "stuffing" assets. For example, if in connection with the acquisition of a US corporation, an existing or new shareholder of the foreign parent company acquires additional stock in exchange for cash, this additional stock will be disregarded. Stuffing assets generally include three specified classes of assets consisting of cash (or cash equivalents), marketable securities and certain obligations (e.g., obligations owed by the foreign parent company), as well as property transferred in connection with the acquisition of the US corporation with a principal purpose to avoid the purposes of Section 7874.

Treasury and the IRS expressed concern that taxpayers were interpreting the principal purpose asset class of the anti-stuffing rule as only applying to indirect transfers of the specified asset classes. Treasury and the IRS disagree with this interpretation, and the 2015 Notice describes clarifying changes to the anti-stuffing rules to provide that the principal purpose asset class can apply to any type of assets, even active business assets.

Accordingly, transfers of business assets to the foreign parent company in exchange for foreign parent company stock can be disregarded if it is determined that the foreign parent company acquired the business assets with a principal purpose of avoiding Section 7874. Factors in determining whether a transfer has such a principal purpose should take into account the relevance of the assets to the existing business operations of the foreign parent company.

Further Limits on Post-Expatriation Restructuring

Significantly, as with the 2014 Notice, the 2015 Notice did not announce any new "earnings stripping" Treasury regulations that would further limit deductions for interest paid by the US corporation to the foreign parent company (or non-CFC affiliates).

Expands Inversion Gain

Following an expatriation, US corporations consider restructuring transactions in which property, including stock of CFCs or intangibles, is transferred to its foreign parent company (or non-CFC affiliates). In addition, US corporations may license property to their foreign parent company (or non-CFC affiliates). Under Section 7874, US corporations generally cannot use pre-expatriation net operating losses or other tax attributes to offset gain or income recognized as a result of such restructuring or license transactions for the 10-year period following the expatriation (inversion gain).

Under these current rules, inversion gain does not include "subpart F" income of such US corporations resulting from transfers or licenses of property by a CFC. For example, if a CFC of a US corporation transferred the stock of another CFC to the foreign parent company, any income inclusion could be offset with available net operating losses. In addition, the transferred CFC would no longer be treated as a CFC and generally could loan or distribute earnings without such earnings being subject to US tax.

The 2015 Notice announces new Treasury regulations that generally will treat subpart F income resulting from restructuring or license transactions during the 10-year period as inversion gain and, thus, cannot be offset with pre-existing tax attributes of expatriated US corporations.

Built-in Gain in CFC Stock

Immediately following an expatriation, the foreign subsidiaries of the acquired US corporation remain CFCs. As CFCs, these foreign subsidiaries remain subject to the subpart F rules and Section 956. US corporations contemplating expatriation transactions typically integrate CFCs with non-CFC foreign subsidiaries of the new foreign parent and do so in a manner such that the resulting entity is not a CFC. Earnings of the former CFCs could be loaned or distributed to the new foreign parent without the earnings being subject to US tax.

The 2014 Notice described Treasury regulations to be issued providing that the US corporation must recognize built-in gain in the stock of any CFC that loses its CFC status in a restructuring transaction during the 10-year period following the expatriation. The amount of built-in gain, however, was limited to the earnings of the CFC that were not previously subject to US tax.

The 2015 Notice expands the announced Treasury regulations described in the 2014 Notice by requiring all built-in gain in the CFC stock to be recognized regardless of the amount of untaxed earnings of the CFC. As a result, CFC restructuring transactions could be more expensive to the extent that the CFC had appreciated property that had not yet generated significant untaxed earnings.

Exception for Insurance Companies

The 2014 Notice described Treasury regulations to be issued that expanded the scope of transactions subject to Section 7874. Under one rule, if more than 50% of the assets of the foreign acquiring corporation group are passive assets, such as cash or marketable securities, then a proportionate amount of the stock of the foreign acquiring corporation will not be treated outstanding for purposes of the Section 7874 stock ownership tests. An exception for active banking assets was based on both the subpart F and PFIC rules while an exception for active insurance assets was only based on the subpart F rules. As a result, many insurance companies were concerned that combination transactions could be subject to Section 7874. The 2015 Notice adopts a similar exception for active insurance assets under the PFIC Rules.

Effective Dates for the New Rules

The 2015 Notice provides that the Treasury regulations described therein and discussed above under "New Third Country Rule," "Limitation on Substantial Business Activities Exception" and "Anti-Stuffing Rules" apply to transactions completed on or after November 19, 2015. No exceptions are provided for expatriation transactions that have executed transaction documents.

In addition, the 2015 Notice provides that the Treasury regulations described therein and discussed above under "Further Limits on Post-Expatriation Restructuring" will apply to transactions completed on or after November 19, 2015, but only if the expatriation transaction was completed on or after September 22, 2014. This effective date is consistent with the 2014 Notice, which provided that additional guidance would be applied prospectively but guidance that only applies to restructuring and other transactions of expatriated groups would apply to those groups that completed expatriations on or after September 22, 2014.

Additional Guidance

As with the 2014 Notice, the 2015 Notice also states that the Treasury Department and the IRS expect to issue additional guidance to further limit expatriation transactions that are contrary to the purposes of Section 7874 and the benefits of post-expatriation tax avoidance transactions. In addition, as with the 2014 Notice, the 2015 Notice specifically mentions that the Treasury Department and the IRS are considering guidance to address earnings stripping transactions. Unlike the 2014 Notice, however, the 2015 Notice does not provide any statements regarding the effective date of any future guidance.

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.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Shearman & Sterling LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions