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
 
In association with
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
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.

Disclaimer

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.

Registration

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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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.