Inversion Notice 2015-79 bootstraps on previous guidance to further constrain tax inversions and post-inversion restructuring.
On November 19, 2015, the Department of the Treasury and the IRS issued Notice 2015-79 (the “Notice”). Interpreting previous guidance, namely Notice 2015-52 and Temp. Reg. § 1.7874-4T, the Notice announces the future issuance of regulations that will provide the following:
- 2.02(a). An expanded affiliated group (“EAG”) cannot have substantial business activities in the country in which the foreign acquiring company (“FA”) is created or organized (when compared to the EAG’s total business activities) unless FA is subject to tax as a resident of the relevant foreign country.
- 2.02(b). Certain stock of FA will be disregarded in cases where the new foreign parent is resident in a country other than that of the primary foreign target. The disregarded stock is not included in the ownership fraction, thus increasing the likelihood that the fraction will reach the dangerous 80 percent threshold.
- 2.03(b). “Clarification” that nonqualified property includes business property if it is transferred with a principal purpose of avoiding the purposes of the anti-inversion rules. Stock of FA exchanged for nonqualified property of a foreign entity is considered “disqualified stock” that is not included in the ownership fraction, thus increasing the likelihood that the fraction will reach the dangerous 80 percent threshold.
- 3.01(b). Inversion gain (that can not be offset by tax attributes for the “applicable period” of 10 years) includes income from indirect transfers or licenses of property through a CFC, such as certain post-inversion subpart F income.
- 3.02(b). An exchanging shareholder must recognize all of the gain realized during the applicable period from the exchange of stock of a CFC (or of a lower-tier CFC) if the exchange substantially dilutes (or terminates) the interest of a U.S. shareholder in the CFC. The purpose of this rule is to capture the tax on any unrealized appreciation in the value of the CFC (in excess of the tax on E&P currently provided under section 1248).
- 4.01(b). Active insurance assets will be excluded from the definition of foreign group nonqualified property, whether owned by a foreign entity or by a domestic entity subject to tax as an insurance company under subchapter L.
- 4.02(b). An exception to the rules designed to prevent the pre-inversion “skinny down” of the domestic expatiating entity, where the former shareholders hold only a de minimis (less than 5 percent by vote and value) ongoing interest in FA or other member of its EAG.
- 4.03(b). Clarification that implementation of the “small dilution” exception, to the rule designed to prevent the post-inversion decontrol and dilution of ownership of CFCs, should be applied using the percentage rather than the amount of CFC stock.
Effective dates: These rules are generally effective for acquisitions completed on or after November 19, 2015. However, 4, 5, & 8 are only effective for transactions also completed on or after September 22, 2014 (the date of Notice 2015-52). In addition, 6 & 7 are taxpayer-favorable provisions that may be elected for acquisitions completed before November 19, 2015.