Daily Tax Update - September 23, 2014: US Treasury Announces First Steps to Reduce Tax Benefits of Inversions

US Treasury Announces First Steps to Reduce Tax Benefits of Inversions: Notice 2014-52, issued yesterday, sets forth regulations that the Treasury Department and the IRS intend to issue, to make inversions more difficult to accomplish and to reduce their tax benefits.  Specifically, the intended regulations outlined in the Notice would prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring US tax through the use of “hopscotch loans.” “Hopscotch loans” are loans that a controlled foreign corporation (CFC) makes to the new foreign parent to avoid the deemed dividend treatment that results under Section 956 in the event of a loan to the US parent.  The Notice provides that “hopscotch loans” will be treated as US property under Section 956(c)(1), and therefore the same dividend rules will apply as if the CFC had made a loan to the US parent prior to the inversion. 

Additionally, the regulations intended by the Notice would prevent “de-controlling,” which involves having the new foreign parent buy enough stock to take control of a CFC away from the former US parent.  The intended regulations would treat the new foreign parent as owning stock in the former US parent, rather than the CFC.  As a result, the CFC would remain a CFC and would continue to be subject to US tax on its profits and deferred earnings.  The intended regulations would also eliminate the ability of inverted companies to transfer cash or property from a CFC to the new parent to completely avoid US tax. 

In order to make inversions more difficult, the intended regulations would strengthen the requirement under Section 7874 that the former owners of the US parent own less than 80 percent of the new combined entity.  The regulations would limit the ability of companies to count passive assets that are not part of the entity’s daily business functions in order to inflate the new foreign parent’s size and therefore evade the 80 percent rule (known as using a “cash box”).  Additionally, the intended regulations would prevent US companies from reducing their size pre-inversion by making extraordinary dividends by disregarding such dividends for purposes of the ownership requirement.  Finally, the intended regulations would eliminate the benefits of “spinversions,” which occur when a US entity inverts a portion of its operations by transferring assets to a newly formed foreign corporation that spins off to its shareholders, thereby avoiding the associated US tax liabilities. 

The intended regulations would apply to inversions that close on or after September 22.  Section 5 of the Notice states that “[t]he Treasury Department and the IRS expect to issue additional guidance to further limit inversion transactions that are contrary to the purposes of Section 7874 and the benefits of post-inversion tax avoidance transactions,” particularly with respect to earnings stripping.  Such guidance will apply prospectively. 

The fact sheet issued by the Treasury Department regarding Notice 2014-52 can be accessed here

Singapore Releases Proposed Regulations to Help Financial Institutions Comply With FATCA:  The Ministry of Finance (MOF), Monetary Authority of Singapore (MAS), and the Inland Revenue Authority of Singapore (IRAS) released proposed regulations to help financial institutions in Singapore comply with FATCA.  Singapore has substantially concluded a Model 1 IGA with the United States, which will be signed by the end of 2014.  Comments on the proposed regulations are due by October 17.