Corporate Inversion Transactions: IRS and Treasury Issue Temporary Regulations to Determine When Stock Is Disregarded for Purposes of the Internal Revenue Code’s Anti-Inversion RulesSullivan & Cromwell LLP - January 22, 2014
On January 16, 2014, the IRS and the Treasury Department issued temporary and proposed regulations (the “Regulations”) that disregard certain stock of a foreign corporation when calculating ownership of the foreign corporation in determining whether the foreign corporation is a “surrogate foreign corporation” for purposes of the anti-inversion rules contained in Section 7874. The Regulations largely adopt the rules described in Notice 2009-78 (the “Notice”), issued on September 17, 2009, but contain several important modifications and additions, including:
- a rule that disregards stock transferred for “obligations” (the “Obligation Rule”), and
- a rule that is intended to provide a safe harbor where former shareholders of the domestic entity own less than 5% of the resulting entity (the “5% Rule”).
The preamble to the Regulations (the “Preamble”) also:
- clarifies that the distinction between asset deals and stock deals is intentional,
- indicates that the application of the “Internal Group Restructuring” exception of Treasury Regulations Section 1.7874-1(c)(2) to divisive transactions could depend on whether the company that only temporarily holds the foreign acquiror stock is domestic or foreign, and
- signals that the IRS and the Treasury Department are studying “sponsored” deals where the buyer in a going-private transaction could exit via a public offering, achieving, according to the IRS and the Treasury Department, the equivalent of inverting a publicly traded U.S. company.
In general, the rules that were both described in the Notice and set forth in the Regulations apply to acquisitions completed on or after September 17, 2009. Additional rules adopted in the Regulations (such as the Obligation Rule) apply to acquisitions completed on or after January 16, 2014.