Pumping up or Sliming down are Inversion Tricks of the Past

Recent changes to rules regarding corporate inversions from the US Treasury Department and IRS make it harder for corporations to disguise it’s true size.

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

offshore-accountsOld tricks aren’t hard to see through – throwing in a few extra pushups right before you pick up your date to inflate the appearance of your biceps is harmless. Same goes for putting your body through a crash diet to drop those last five pounds before your big event. Both aim to disguise your true size and the US Treasury department is saying that corporations can no longer use these tricks.

Pumping Up with Passive Assets

In order to meet the required new foreign parent’s size to meet the required 80% rule corporations would inflate the new foreign parent’s size through “cash boxes”. “Cash boxes” are passive assets such as cash or marketable securities that are not actually used to support daily business functions.

New rules state that stock of the foreign parent that is attributable to passive assets would be disregarded as the company size is evaluated for the 80% requirement. This rule would apply is at least 50% of the foreign corporation’s assets are passive, since they are using their passive assets to inflate their true size. Banks and financial services companies are exempted from this rule.

Slim Quick

You can argue the effectiveness of this diet shake to actually provide lasting slimming results, but it won’t work in fooling the Treasury. A new rule prevents foreign companies from artificially reducing their size by paying out large dividends to reduce their size before an inversion. This makes it much harder for U.S. entities to invert offshore and now requires that the former owners own less than 80% of the combined company. Offshore companies that did slim down could be in trouble as they have filled back out and could now have more than 80% of the entity’s ownership.

Spins don’t fool us

Going around in circles never got you anywhere and now a spinversion won’t either. A spinversion is a partial inversion where a U.S. company transfers a portion of its assets to a newly formed foreign corporation. This foreign corporation is then “spun off” to public shareholders, thus avoiding taxation as a U.S. company. This rule was originally created to allow for purely internal restructuring by multinational companies. Now that this rule has been abused for the purpose of tax avoidance the U.S. Treasury is taking it away. New rules treat these types of spin-off companies as a domestic corporation and take away any offshore tax advantage of such a maneuver.

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.

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