AbbVie had an expensive breakup, but at least it came with benefits

Not all breakups come with financial benefits, but AbbVie can look to add an estimated $650 million to its tax deductions thanks to stepping out of a deal with Shire.

Jeffrey S. Freeman, J.D., LL.M

shutterstock_65714203Following the September 22, 2014 announcement from the US Treasury Department and IRS, corporations that were contemplating acquisitions had some new rules to play by. Aimed to discourage acquisitions with the sole purpose of inverting company ownership, several deals have quickly fallen to pieces.

Companies had been playing by the rules as they left the high 35% corporate tax rate in the U.S. and sought relief by hitching themselves to a lower tax rate suitor. Previously, in order for a U.S. company to avoid paying U.S. taxes on its foreign earnings it needs to be more than 20% foreign owned. U.S. earnings would still be taxed at the 35% corporate tax rate, but foreign earnings would no longer fall into America’s tax system.

Companies that already had deals on the table had some new rules to follow and needed to determine if their marriage was actually beneficial under the new policies. The new regulations severely limit the benefits for inverted companies.

  • Inverted companies can no longer access a controlled foreign corporations (CFC’s) earnings while deferring US tax through “hopscotch” loans, which were used to let companies access foreign cash without paying U.S. taxes.
  • Inverted companies cannot access a CFC’s earnings tax free by having the new foreign parent purchase enough of the CFC stock to acquire control from the old US parent.
  • Inverted companies cannot avoid US tax by transferring cash or property from a CFC to a new foreign parent. This was typically done by selling the new foreign parent’s stock in the old US parent company to a CFC that has deferred earnings in exchange for cash and property of the CFC.
  • Former shareholders of the old US parent must now own less than 80% of the new foreign parent.

After taking a look, AbbVie backed out of a $55 billion deal with Irish-headquartered Shire. Breaking off such a monumental deal did not come without some expenses, but there is a silver lining for AbbVie. First, AbbVie must pay a break-up fee to Shire of $1.64 billion. But, thanks to the U.S. tax law this huge fee is fully tax deductible. Looking closer there are even more fees that can be deducted including fees paid to tax advisers and bankers. This could net AbbView approximately $650 million in tax savings.

Although not the benefit the IRS or AbbVie were intentionally seeking, both seemed to have gotten a bit of a silver lining benefit from the new regulations; the IRS kept another company within its tax reach and AbbVie got a tax break for breaking up.

About Freeman Tax Law

Freeman Tax Law (FTL) is a boutique law firm consisting of a multi-disciplinary team of tax professionals including tax attorneys, CPAs and a professional staff that have vast experience with foreign tax compliance and regulatory matters for financial institutions. FTL consults with both FFIs and USFIs with regard to Foreign Account Tax Compliance Act (FATCA) and related regulatory matters and assists them developing procedures on how to comply with these laws. FTL provides a multidisciplinary approach for filing offshore voluntary disclosures. Working to help clients prevent future tax headaches we offer a complete wealth management and estate planning team. As an experienced firm with wide reach, Freeman Tax Law provides immediate assistance to our clients planning for and resolving all tax related challenges.

Freeman Tax Law

(855) 935-5945

[email protected]