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October 2014


Treasury Notice on Inversions Leaves Basic Inversion Transactions Intact







For more information about this e-Alert, please contact the authors:


William J. Sanders

Practice Area Chair



Robert A. N. Cudd



Wade S. Leathers




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On September 22, 2014, its Treasury Department issued Notice 2014-52 (the "Notice") designed to curb inversion transactions, which are believed to be inconsistent with its purposes of Section 7874 of this Internal Revenue Code of 1986, as amended (its "Code"). The effective date of the Notice and any Treasury regulations to be promulgated pursuant to the Notice is for any inversion transactions not completed on or before September 22, 2014, the date the Notice was issued.

In a corporate inversion, a foreign parent corporation becomes the parent corporation of a multinational corporate group replacing the U.S. (domestic) corporation as the parent corporation of the group. Consequently, the offshore profits retained by foreign subsidiaries which were formerly controlled foreign corporations ("CFC's) can be distributed to the foreign parent and future taxable income earned by foreign subsidiaries will not be subject to U.S. taxation when earned or distributed to other foreign corporations in the group. Finally, the foreign parent corporation could make loans to the former U.S. parent or other U.S. corporations within the multinational group and thereby reduce their U.S. income tax liabilities by interest deductions on those loans. [More ...]

Deferred Earnings and Profits of CFC's

The Notice focuses primarily on preventing the foreign parent from accessing the deferred earnings and profits of existing CFCs by proposing Treasury regulations under three different Code sections: Sections 956(e), 7701(l) and 304(b)(5)(B). [More ...]

Code Section 956(e)

The Notice addresses post inversion tax avoidance transactions by proposing to issue Treasury regulations under Section 956(e) of the Code. [More ...]

Code Section 7701(l)

The Notice invokes the regulatory authority of Sections 7701(l) which permits the Treasury to prescribe regulations recharacterizing any multiple–party financing transaction as a transaction directly among 2 or more of such parties where it is determined that such recharacterization is appropriate to prevent avoidance of taxes under its Code. [More ...]

Code Section 304(b)(5)(B)

The Notice clarifies the application of Sections 304(b)(5)(B) which excludes the earnings and profits of a CFC, the acquiring corporation, from being taken into account in a redemption in which it acquires stock of its U.S. direct parent corporation from its indirect foreign parent corporation, if more than 50% of dividends would neither be subject to tax or included in the earnings and profits of a CFC. [More ...]

Code Section 7874

The Notice states that Treasury regulations will be promulgated under Section 7874 to prevent the use of passive assets by foreign acquiring corporations and distributions by the U.S. group of corporations to qualify under the 60% or 80% ownership test. [More ...]

Request for Comments

The Notice request comments on "earnings stripping" of U.S. source earnings through intercompany debt and otherwise. The Notice indicates that the Treasury is reviewing its treaty policy regarding inverted groups. The Notice states that any future guidance will be prospective only.

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