Straight Talk on Inversions

by Bill Henson on October 31, 2014

The corporate structuring transaction known as an “inversion” has been front and center recently regarding U.S. corporate tax policy. Corporate inversions typically involve the acquisition of a U.S. corporation by a foreign corporation, during which the U.S. corporation’s shareholders acquire a majority interest in the “acquiring” foreign corporation.

The transaction benefits corporate groups that earn a significant amount of their earnings outside the United States. The benefit arises from avoiding U.S. corporate tax on earnings generated abroad. In addition to having the highest corporate income tax rate in the world, the United States is also one of the few countries that taxes earnings that have already been taxed in a foreign jurisdiction. Virtually all developed countries, including the U.K. and Canada, allow for a tax exemption on earnings that have already been subject to tax abroad.

At one point in history, it was possible to carry out an inversion transaction tax free. However, then, as now, Congress did not look favorably upon inversions. Their opening legislative salvo rendered inversion transactions fully taxable at either the corporate or shareholder level, depending on how it was structured. Even so, many public companies found that their shareholders were either indifferent or in loss positions, and inversions continued. Another round of legislation was enacted in 2004 to further curb the practice.

A third wave of inversions has recently emerged, undaunted by congressional opprobrium and the economic burden of a fully taxable transaction. In response, the Treasury department announced a new series of rules designed to make these transactions even more unpalatable.

In light of these new rules, many business owners may wonder if an inversion will provide them any benefit. Understanding some of the major limitations of an inversion transaction may help you determine if an inversion will be beneficial.

  • The transaction is only beneficial to corporate groups that have significant non-U.S. operations (or expect to have significant non-U.S. operations).
  • An inversion transaction is fully taxable. The tax can be imposed at either the shareholder or the corporate level, depending on the steps taken to create the structure. Gain is calculated based on either the fair market value of the company shares or the company’s assets.
  • The existing U.S. company shareholders must accept at least a 20 percent dilution of their ownership (but they can retain majority ownership).
  • The benefits are significantly limited when the acquiring foreign corporation ends up owned more than 50 percent by U.S. shareholders who each have a 10 percent or greater interest.
  • The tax benefits only apply to earnings that are not repatriated to the United States.
  • The details of the latest round of anti-inversion rules have not yet been released. The new rules seem to be focused on limiting the ability to reduce the U.S. tax base of the “inverted” U.S. company and on limiting the ability of shifting the accumulated earnings of the foreign subsidiaries out from under the U.S. company (and the U.S. tax net).

If there are any current or future U.S. tax benefits after you take into consideration all of the above limitations, an inversion may be beneficial.

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Straight Talk on Inversions

by Bill Henson on October 10, 2014

The corporate structuring transaction known as an “inversion” has been front and center recently regarding U.S. corporate tax policy. Corporate inversions typically involve the acquisition of a U.S. corporation by a foreign corporation, during which the U.S. corporation’s shareholders acquire a majority interest in the “acquiring” foreign corporation. Read more at plantemoran.com.

If you have any further questions, please contact Bill Henson at 312-602-3635 or Bill.Henson@plantemoran.com.

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