Yesterday evening, the Internal Revenue Service (the “IRS”) and the Treasury Department (the “Treasury”) issued new temporary regulations and final regulations that address inversion transactions and certain post-inversion transactions.

The most notable new anti-inversion rule in the temporary regulations addresses so-called “serial inversions”.  This rule is intended to address a case where the “foreign acquiring corporation” previously acquired one or more domestic entities—in effect making the foreign acquiring corporation larger and more attractive as an inversion counterparty for a larger domestic entity.  Under the new rule, in general, stock of the “foreign acquiring corporation” will be disregarded (for the purposes of determining the relative sizes of the domestic entity and the foreign acquiring corporation) to the extent of the value of the domestic acquisitions closed within three years of signing the new deal.  This makes it more likely that the domestic entity’s shareholders will be treated as owning either at least 60% or at least 80% of the combined company and causing the combined company to be subject to consequences of being an “inverted” company.  This rule will generally apply to transactions that close on or after April 4, 2016.

The other rules set forth in the Temporary Regulations are generally consistent with guidance previously issued in Notice 2014-52 and Notice 2015-79 and will generally apply as described in the original pronouncements.

In addition, yesterday evening, the IRS and the Treasury issued a notice of proposed rulemaking that, if finalized, will cause very significant changes in the structuring of debt capitalization of U.S. subsidiary groups owned by foreign corporations (and of foreign subsidiaries owned by U.S. corporations).  The proposed regulations provide that certain related party debt would be recharacterized as equity, or as part-debt and part-equity, if, for example, such debt were issued to finance a related party acquisition or such debt was distributed to a related corporate shareholder.  Although the main purpose of the proposed regulations may have been to negate one of the main tax benefits of an inversion, their reach extends far beyond the context of inversions and will have an impact on the tax planning of multi-national corporations and investments. The proposed regulations will apply to debt issued on or after April 4, 2016; however, such debt will retain its characterization as debt until 90 days after the final regulations are published.

More detailed memoranda explaining the new regulations will be forthcoming.