Tax Analysts provides news coverage, analysis, and commentary on cross-border mergers and acquisitions, including tax-driven inversions and anti-inversion guidance, regulations, and legislation.
A corporation inverts for tax purposes when it reincorporates in a foreign country to reduce its tax rate and access offshore cash efficiently. An inversion involves substantial business activities in a foreign country or the merger of a U.S. company with a foreign company and reincorporation in a foreign jurisdiction, typically Ireland, the U.K., the Netherlands, Bermuda, or the Cayman Islands due to low corporate tax rates and tax incentives, primarily patent boxes and incentives for research & development (R&D) of intangibles. Notable inversions have involved companies such as Tyco International, Medtronic, and Eaton Corporation.
Under section 7874 former shareholders of the domestic corporation must own less than 60 percent of the new company to avoid surrogate foreign corporation status and less than 80 percent to avoid treatment as a domestic company. Obama and members of Congress have proposed a 50 percent threshold.
Many politicians consider inversions unpatriotic tax-avoidance tactics. Anti-inversion legislation was enacted in 2004 and Treasury issued guidance September 22, 2014 — Notice 2014-52, 2014-42 IRB 712 — to make inversions and their benefits more difficult to achieve. The Notice included anti-skinny-down rule, hopscotch loan rule, and decontrolling or de-CFC rules, but did not include earnings-stripping guidance. Many experts agree that a Congressional response to inversion deals as part of major tax reform is necessary.
Cross-border M&A requires consideration of tax structuring, foreign law, bilateral tax treaties, tax-free reorganization rules, section 368, section 367, section 956, tax attributes, FIRPTA, repatriation of earnings, mix of consideration, acquisition of stock versus assets, due diligence, transfer taxes including stamp duty and VAT, and potential CFC or PFIC status.