On May 20, 2014, House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., introduced H.R. 4679, the Stop Corporate Inversions Act of 2014 (the “Bill”)1addressing “inversion” transactions, which are transactions pursuant to which U.S. corporations restructure themselves tax-efficiently as foreign corporations in order to achieve relief from various tax burdens associated with being a U.S. corporation under current U.S. corporate income tax rules.
The Bill would make it significantly harder for U.S. corporations to engage in “inversions”, by merging with suitable foreign corporations. This inversion structure came to the attention of the general public with various recent high-profile inversion mergers. The Bill is intended to stop similar transactions. To this end, the Bill would modify Section 7874 of the U.S. Internal Revenue Code to treat a foreign corporation as a U.S. corporation for U.S. tax purposes if the foreign corporation acquires, for stock, cash, or other consideration, a U.S. corporation or substantially all of the assets of a U.S. corporation and, after the acquisition, the foreign corporation (on a group-wide basis) has (i) its “management and control” primarily within the United States and (ii) has significant U.S. business activities (at least 25% of its employees, assets, and income). An exception is provided, however, where the foreign corporation has “substantial business activities” in its home jurisdiction. In addition, the Bill would treat a foreign corporation acquiring a U.S. corporation by way of a stock merger as a U.S. corporation if, immediately after the merger, (i) shareholders of the U.S. corporation hold more than 50% (rather than current law’s 80%) of the foreign corporation and (ii) the “substantial-business-activities-in-foreign-home-jurisdiction” exception does not apply. The Bill may have unintended consequences such as potentially converting a foreign corporation into a U.S. corporation if it acquires solely for cash a substantial U.S. business as part of a global expansion strategy.
The Bill, which is intended to be a 2-year moratorium until comprehensive tax reform is enacted, would apply to transactions occurring in taxable years ending after May 8, 2014 (without any grandfathering for transactions previously agreed to or announced).