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June 27, 2022

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Mergers and Acquisitions Update: Broad Anti-Inversion Rules Released

On April 4, 2016, Treasury released new rules making it more difficult for some U.S. companies to invert (“Serial Inversion Regulations”) Proposed Regulations limiting the effectiveness of “earnings stripping” techniques (“Earnings Stripping Regulations”), and Final and Temporary Treasury Regulations incorporating rules previously described in Notices 2014-52 and 2015-79. 

Key takeaways from the Serial Inversion Regulations include:

  • The Serial Inversion Regulations exclude foreign company stock attributable to domestic company acquisitions within three years of the signing date of the latest acquisition for purposes of determining the ownership threshold percentage under section 7874.

  • The application of this rule does not depend on whether “there was a demonstrable plan to undertake the subsequent domestic entity acquisition at the time of the prior domestic entity acquisitions”, which effectively precludes a foreign company from bulking up by acquiring a series of smaller domestic companies.

  • This rule has only a three year life, generally applying to acquisitions completed on or after April 4, 2016.  The rule expires on April 4, 2019.

Key takeaways from the Earning Stripping Regulations include:

  • The Earnings Stripping Regulations may recharacterize all or a portion of debt issued by an inverted domestic company to a new foreign parent as stock for tax purposes, rendering payments on the instrument nondeductible dividends rather than valuable U.S. tax deductions.

  • These rules generally apply to purported debt instruments issued on or after April 4, 2016.  However, a debt instrument treated as stock under the Earnings Stripping Regulations will continue to be treated as debt for tax purposes until 90 days after the Earnings Stripping Regulations are issued in final form.

  • Other rules released with the Earnings Stripping Regulations, including the documentation of key information involving related party debt instruments, will not be effective until final Earnings Stripping Regulations are issued.

© Copyright 2022 Cadwalader, Wickersham & Taft LLPNational Law Review, Volume VI, Number 96
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About this Author

William P. Mills, Partner, Cadwalader law firm
Partner

William Mills represents clients in a wide range of transactions, including mergers and acquisitions, divestitures, public and private securities offerings, shareholder activism, proxy contests, spin-offs, restructurings, leveraged buyouts, tender and exchange offers, and joint ventures. He regularly advises public companies and boards of directors on corporate governance, fiduciary duty and disclosure matters, as well as investment banks as financial advisers on M&A and other transactions.

Bill is co-chair of Cadwalader's Corporate Group and co-chair of the firm's Health Care...

212 504 6436
Linda Z. Swartz, Cadwalader, complex global mergers lawyer, joint ventures attorney
Partner

Linda Swartz, the Chair of Cadwalader's Tax Group and a member of the firm's Management Committee, focuses her practice on structuring complex global mergers and acquisitions, spin-offs, joint ventures, and restructurings, and on foreign tax planning strategies. She also has considerable experience advising clients on financings, derivative transactions, and executive compensation issues.

212 504 6062
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