Corrado Cardarelli Comments on New U.S. Inversion Rules in Lexpert

U.S. Crackdown on Tax Inversions Will Chill Cross-border M&A

December 11, 2014

Amid ongoing discussion in the U.S. government on addressing inversion transactions, the Department of the Treasury and the IRS released proposed regulatory changes directed at inverting. Corrado Cardarelli, partner and chair of the firm’s Tax Practice, weighs in on the draft changes and their implications in Lexpert. Below is an excerpt of the article.

“One of the difficulties in deciding whether to proceed is that the rules as formulated in the notice of September 22 are not final and could still change to catch a wider net of transactions,” says Corrado Cardarelli in Torys' Toronto office. “However that may be, there's definitely going to be a chilling effect.”

The first change, which will take retroactive effect to September 22, strikes at a key feature in a tax-inversion transaction, namely the requirement that shareholders in the US company cannot own more than 20 per cent of the combined company, a formula known as the “inversion fraction.”

The new rules make it harder to meet that fraction by disregarding some of the stock issued by the new parent if more than 50 per cent of its assets are passive or marketable securities. “The reason for this change is that many of the non-US merger candidates are companies with lots of cash and no real activity,” Cardarelli said.

The second change is aimed at US companies who have “slimmed down” in anticipation of an inversion, perhaps by paying extraordinary dividends or effecting sales that are not in the ordinary course of business. The reduced value of these companies means that their shareholder will be entitled to fewer shares in the new parent company, making the inversion fraction easier to meet. Under the new rules, however, the IRS will ignore the slimming transactions for the purpose of calculating the inversion fraction if the slimming occurred within 36 months of the inversion.

Other changes will affect future tax planning and tax benefits, even for inversions completed before September 22. These changes treat payments made from the subsidiaries of the US company directly to the new parent (through tax-planning techniques known as “hopscotch” and “decontrol” transactions) as having been received by the US company and therefore subject to the country's 35-per-cent corporate tax, among the highest in the world.

“Obviously, there will still be opportunities for companies that are not merging with a foreign cashbox or haven't slimmed down,” Cardarelli says.

To read the full article, click here.

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