Notice 2015-79: new anti-inversion guidance.

• Author: Shapel, Natallia

On Nov. 19,2015, the IRS issued its latest inversion guidance in Notice 2015-79, which introduces new restrictions on corporate inversions and post-inversion restructuring transactions.

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A corporate inversion is a transaction that results in the replacement of a U.S. parent of a multinational group with a foreign parent. The anti-inversion rules fall under Secs. 7874 and 367.

Sec. 7874 applies to a transaction completed after March 4,2003, if under a plan or series of related transactions:

1. A foreign corporation acquires (directly or indirectly) substantially all of the properties of a domestic corporation (or substantially all of the properties constituting a trade or business of a domestic partnership);

2. The shareholders (or partners) of the domestic corporation (or partnership) hold at least 60% of the vote or value of the foreign corporation by reason of holding stock in the domestic corporation (or interest in the partnership); and

3. The foreign corporation, considered together with all companies connected to it by a chain of greater than 50% ownership (i.e., the expanded affiliated group, or EAG), does not conduct substantial business activities in its country of incorporation compared with the EAG's total worldwide business activities.

If an inversion transaction meets all of the above tests, the foreign acquiring corporation is treated as a surrogate foreign corporation with respect to the expatriated domestic corporation or partnership. The tax treatment of the surrogate foreign corporation varies, depending on the level of shareholder continuity. If the owners of the former domestic entity own, by vote or value, 80% or more of the surrogate foreign corporation following the inversion, the foreign corporation is treated as a domestic corporation for all purposes of the Code and for all U.S. treaty purposes. If the ownership by former shareholders of the inverted corporation is less than 80% but is at least 60%, the surrogate foreign corporation is treated as a foreign corporation. However, the expatriated entity is denied the use of its tax attributes (e.g., net operating losses (NOLs) or certain credits) to offset the inversion gain for the succeeding 10-year period, and other adverse implications can apply (e.g., the Sec. 4985 excise tax on the value of certain stock-based compensation held by certain corporate insiders).

Additionally, if the foreign parent is respected as a foreign corporation under Sec. 7874, then Sec. 367 needs to be considered. Generally, Sec. 367 triggers U.S. income tax at the corporate and/ or shareholder level upon transfer of the former U.S. parent's stock or assets to the new foreign parent.

Details: Notice 2015-79

The notice generally addresses transactions structured to avoid the application of Secs. 367 and 7874. Specifically, it provides guidance to (1) limit the ability...