IRS Notice 2014-52 (the “Notice”) includes broad new rules designed to increase the tax cost of U.S. corporate inversions and reduce opportunities to lower global effective tax rates following an inversion. These new rules, generally effective only for transactions occurring on or after September 22, 2014, would limit so-called “cash-box” inversions, narrow opportunities to tailor the size of a U.S. corporation to fit under an exception, and preserve future U.S. taxation of existing controlled foreign corporations (“CFCs”) under the U.S. target corporation (the “U.S. target”).

While the new rules are summarized briefly below, they are lengthy and complex, and may apply to future transactions even in the absence of an inversion.

New Limits on Outbound M&A Transactions

The main focus of the new rules is to expand the class of transactions that are subject to the statutory anti-inversion regime of existing Code section 7874, under which the acquiring foreign corporation is treated as a domestic corporation for all U.S. tax purposes following the transaction if shareholders of the U.S. target are considered to own 80% or more of the foreign acquiring corporation.1

Section 7874 also imposes limits on U.S. targets where their shareholders own at least 60% but less than 80% of the foreign acquirer, and the new rules will make those inversions less attractive as well. Finally, the new rules cover certain transactions that do not involve a section 7874 inversion at all.

Expansion of transactions covered by section 7874. Future regulations will expand the scope of section 7874, and therefore change how inversion transactions may be accomplished under existing exceptions, in the following ways:

  • Limits on “cash-box” inversions. If more than 50% of a foreign acquirer’s assets are passive, then a proportionate amount of the acquirer’s stock is excluded from the denominator of the fraction used to compute the 80% threshold. In practice, this rule will at least limit the size of U.S. targets that may be acquired without triggering U.S. corporate status for the foreign acquirer of a U.S. target.
  • Limits on downsizing the U.S. target before an inversion. Non-ordinary course dividends and buybacks that reduce the equity value of the U.S. target (whether or not an inversion transaction has been considered) and that take place within 36 months before a potential inversion will be added back to the numerator in determining the 80% threshold. (A similar rule will be added to regulations under Code section 367(a) to ignore the effect of such a dividend in determining whether the acquisition meets the 50% threshold for taxability of U.S. target shareholders.)
  • Limits on “spin-versions”. Transactions such as a dropdown of a U.S. subsidiary of a U.S. parent corporation to a foreign corporation and a subsequent spinoff of the holding corporation will no longer qualify for an exception to section 7874.

Limits on post-inversion transactions reducing future U.S. taxation. The Notice includes additional rules that will make it harder for U.S. targets that avoid the 80% threshold to restructure their CFCs in a manner that will reduce future U.S. taxation of their historic earnings and future operations. Specifically, under the Notice, the following rules will apply to U.S. targets that are acquired by a foreign acquirer in a transaction that falls below the 80% threshold (“expatriated entities”) during the 10-year period following the acquisition:

  • Historic CFC earnings taxed upon acquisition of foreign acquirer debt or equity. An investment by a CFC in a foreign-related party (other than another expatriated entity subsidiary) will trigger a deemed dividend to the U.S. target under Code section 956. This rule is intended to prevent use of funds by “hopscotching”.
  • Limits on decontrolling a CFC after the inversion. Under the new rules, if the foreign acquirer (or other non-CFC affiliate) acquires stock of a CFC subsidiary of an expatriated U.S. corporation for cash or property, the acquisition will be recharacterized as a conduit financing transaction through the U.S. target. Future distributions made by the CFC on those shares will be recharacterized as having been made first to the U.S. target and then second by the U.S. target to the foreign holder. A similar rule applies if the U.S. parent transfers the stock of the CFC to the foreign acquirer or a foreign-affiliated entity (unless the transfer is fully taxable or results in a full inclusion of historic CFC earnings to the U.S. target under section 367(b)).
  • CFC earnings repatriated in certain dilution transactions. Under current law, a U.S. shareholder that transfers stock of a CFC in a reorganization or similar tax-free transaction is required to include in its income the earnings and profits of the CFC that are attributable to the period its shares have been held by its U.S. shareholders, but an exception applies where the shareholder continues to hold a significant interest in a CFC. The Notice eliminates this exception in the case of a transfer of stock of an expatriated entity subsidiary (unless the ownership of the U.S. target is diluted by less than 10% in the transaction).
  • Limits on opportunities to extract historic CFC earnings and profits without U.S. tax. The Notice will limit how Code section 304 permits recharacterization of affiliate stock purchases to reduce untaxed historic earnings of CFCs. Unlike most of the other rules in the Notice, this rule will apply regardless of whether the CFC in question was a held by or through an expatriated entity.

Effective Date. As noted above, the new rules generally apply only to U.S. targets that are acquired by a foreign acquirer on or after September 22, 2014. No grandfathering exception applies to transactions undertaken pursuant to binding agreements entered into (or reflected in regulatory filings made by a listed company) before this date.


All of the rules described in the Notice are to be issued under statutes that generally grant the Treasury Department broad regulatory authority. Nevertheless, some of the new rules may be vulnerable if taxpayers challenge them as being beyond the scope of Treasury’s delegated power. Publication of the Notice will undoubtedly affect how future inversions are structured and who may participate, and limit tax-reducing techniques used by U.S. targets inverting on or after September 22, 2014.