The Topsy Turvy Status of Inversions – Levins Move Forward, Wyden and Pfizer Move Back

Senator Carl Levin (D-Mich.) and 13 other Senate Democrats introduced legislation on May 20th that would significantly reduce the ability of U.S. companies to expatriate.  The Stop Corporate Inversions Act of 2014 would generally enact President Obama’s budget proposal targeting corporate inversions (see our prior post) by reducing from 80% to 50% the post-inversion ownership threshold for treating a foreign corporation as domestic.  Sen. Levin’s brother, Congressman Sandy Levin (D-Mich.) introduced companion legislation in the House of Representatives.

Under current law, an inversion transaction generally involves the acquisition by a foreign corporation of substantially all of the properties of a domestic corporation, if the shareholders of the domestic acquired corporation receive at least 80% of the vote or value of the foreign acquiring corporation’s stock in that transaction. In such a case, section 7874 causes the foreign acquiring corporation to be treated as a domestic corporation for U.S. tax purposes. If, following the transaction, the former shareholders of the domestic corporation hold 60% to 80% of the interests in the acquiring corporation, the foreign acquiring corporation is not treated as a domestic corporation, but there are certain limitations on its ability to uses losses and deductions to offset its U.S. taxable income over a ten-year period following the transaction.

Under the legislation, if former shareholders of the domestic corporation own more than 50% of the foreign acquiring corporation following the transaction, then the foreign corporation would be treated as a domestic corporation.  Further, even if the former shareholders of the domestic corporation own less than 50% of the foreign acquiring corporation, the foreign corporation will treated as domestic if it is managed and controlled primarily in the United States and has significant domestic business activities.

The legislation would be retroactive to May 8, 2014, but would expire in two years.

The legislation follows Senator Ron Wyden (D-Ore.) dramatically writing in the Wall Street Journal that he would push to lower the ownership threshold to 50% retroactive to May 8th, the day before his op-ed was published (read the Wall Street Journal op-ed).  But, on May 20, Sen. Wyden said that he would push the change in the context of tax reform, and not as a stand along bill. (see Tax Notes)

Ironically, the day before the Levin’s introduced their legislation, the merger which likely spurred the legislative activity may have died.  It had been widely reported that Pfizer would expatriate to England if and when it acquired AstraZeneca, but on May 19th, AstraZeneca reportedly rejected Pfizer’s “final offer.”  (see New York Times coverage)

See coverage in Bloomberg and Reuters

Read the summary of Sen. Levin’s bill

Read the Stop Corporate Inversions Act of 2014

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