Corporate Inversions

The principal tax benefit of an inversion transaction is that a foreign controlled corporate group can create tax avoidance opportunities by sheltering U.S. profits of the U.S. corporate group with deductible payments made to foreign related parties. Moreover, tax benefits are enhanced to the extent that foreign subsidiaries held by the U.S. group (and thereby subject to the U.S. subpart F rules) are restructured or their operations are otherwise transferred to related foreign corporations that are outside the scope of the U.S. subpart F regime because the new foreign parent’s widely held stock places it outside the definition of a controlled foreign corporation. * Many inversions were subject to full taxation at the shareholder level (and sometimes at the corporate level) under prior law. The absence of gain or availability of losses or other income-sheltering tax attributes, however, often mitigated the tax cost in consummated transactions. Notwithstanding the “toll charge” on inversions under prior law, Congress concluded that corporate inversion transactions should be further deterred because of the significant opportunities to strip earnings out of the United States. Congress also believed that similar benefits could be achieved from inversion transactions involving U.S. businesses conducted in partnership form. * . . . [S]ection 7874 operates to effectively disregard the inversion (i.e., in the case where former shareholders own at least 80 percent of the acquiring foreign corporation) or limit the benefits of an inversion (i.e., in the case where the former shareholders own less than 80 percent but at least 60 percent of the acquiring foreign corporation). | U.S. tax treatment of inversion transactions * A U.S. corporation may reincorporate in a foreign jurisdiction and thereby replace the U.S. parent