By: Amanda Wilson
A few weeks ago, I posted about the increasing popularity of U.S. corporations moving their headquarters abroad, as illustrated most recently by the proposed Burger King/Tim Hortons merger. This type of transaction is referred to as a corporate inversion, which is a transaction in which a U.S. based multinational corporation restructures so that its U.S. parent is now owned by a foreign parent corporation (a Canadian corporation in the Burger King/Tim Hortons proposed acquisition). A corporate inversion has gained increasing popularity because of the high U.S. corporate tax rate and the desire to minimize U.S. taxes. For obvious reasons, the Obama administration does not like corporate inversions and wants to stop them.
Yesterday, the Treasury Department took its first step in attempting to stop corporate inversions. First, it has made it more difficult for U.S. corporations to invert by requiring that the former owners of the U.S. company own less than 80% of the post-inversion entity. The Treasury Department also announced a new rule to do away with so-called “hopscotch loans”. A loan by a foreign subsidiary to a U.S. entity will be treated as a dividend to the U.S. parent, resulting in U.S. taxes. Inverted entities have avoided this rule by having the foreign subsidiary make the loan to the new foreign parent entity. The Treasury Department announced that these “hopscotch loans” by foreign subsidiaries to the new foreign parent will now be treated as investment in U.S. property, resulting in such loans being treated as a taxable dividend from the foreign subsidiary to the U.S. parent.
Yesterday’s announcement was simply a first step, as the Treasury Department stated that it will continue to look for other actions that it can take to limit the tax benefits of inversions. So stay tuned.