More and more US citizens who live abroad and have acquired citizenship in their country of residence have opted to renounce their US citizenship, namely to avoid onerous US tax reporting obligations, which have become even greater with the adoption of the Foreign Account Tax Compliance Act (“FATCA”) in 2014.
There is however another type of renunciation of US status that has become increasingly popular: corporate inversion. This is the process by which a corporation changes its legal domicile (i.e. its residence) from its country of corporation to a more fiscally advantageous country. A US corporation can accomplish this by purchasing a corporation in a low-tax country or merging with it and subsequently designate this foreign country as its legal domicile.
Once the merger or the acquisition has occurred, the multinational corporation can benefit from the lower tax rates in the jurisdiction in which it has its domicile and ceasing to be subject to US corporate tax on its worldwide income at a rate of up to 35% (the highest US federal corporate tax rate on corporations that are legally domiciled in the United States).
In 2014, the US Treasury Department adopted a series of measure to close loopholes in US tax law that allow for corporate inversion. One of these measures is to severely apply the rule under which the shareholders of the US branch of the multinational corporation may not own more than 80% of the shares of the multinational corporation having elected a legal domicile outside of the United States. More specifically, should the former owners of a US corporation own at least 80% of the shares of the multinational corporation created as a result of a corporate inversion, the multinational corporation is treated as a US domestic corporation and is therefore subject to US federal corporate tax on its worldwide income.
Another measure to crack down on corporate inversion is to reduce the available tax advantages under US tax law for US corporations that change their legal domicile. If the former owners of a US corporation own at least 60% of the shares of a multinational corporation created as a result of a corporate inversion, the multinational corporation will remain a foreign corporation for US tax purposes, but it loses the benefit of tax attributes that would allow it to reduce its US taxable income.
These measures were followed up by additional measures in 2016. These measures include the punitive treatment of “serial inverters”, foreign corporations that have acquired interests in a US corporation within 36 months prior to the signing date of the acquisition of another US corporation. If a foreign corporation is deemed to be a serial inverter, then the value of the stock of that corporation is reduced by the value of other corporate inversion deals based on the value of the foreign corporation’s stock at the time of the subsequent acquisition.
For more information on the analysis of the tax and estate planning consequences associated with the corporate inversion of US corporations, please consult one of experienced cross border tax and estate planning attorneys to review your plan and assist you with implementing it.
The comments offered in this article are meant to be general in nature and are not intended to provide legal advice regarding any individual situation. Before taking any action involving your individual situation, you should seek legal advice to ensure it is appropriate for your circumstances.
About the author
Shlomi Steve Levy is a Partner of Levy Salis LLP and is a member of the Quebec Bar, the Law Society of Ontario (L3), the Society of Trust and Estate Practitioners, and the Canadian Bar Association.