What is a corporate tax inversion and is it right for my company?

A Louisiana corporate tax inversion is a transaction that can be leveraged by a company to continue to operate in the U.S., but not be liable to its tax laws. This is achieved by allowing the company to restructure, and in doing so, it replaces the U.S. parent of the company by a parent company that is based in a foreign country outside the U.S.

It should be noted that current law does recognize the propensity for abuse of the corporate inversion framework by companies that may seek to relieve themselves of their tax liabilities. It also does impose tax fines on any company that appears to have conducted a corporate tax inversion primarily for that purpose. Given the rapid growth rate of tax inversion transactions that are taking place it is possible for regulators to closely scrutinize such transactions and fine companies.

Regulators take into consideration two criteria that must be met for them to deem that a company is conducting a tax inversion transaction to circumvent its U.S. tax obligations. The first red flag is that less than a quarter of the new restructured company’s business is conducted in the foreign parent’s home country. The second red flag is that over 60 percent of the shares that are publicly traded by the new foreign based company are owned by the former shareholders of the U.S. based company that existed prior to the transaction.

If these two criteria are met and the shareholders stake in the new company is at least 80 percent or more then the new company is treated as a U.S. based company and all of its tax obligations prior to the transaction still hold. Nonetheless, if the shareholder’s stake in the new company is between 60 percent and 80 percent, then the emergent company is treated as a foreign company though other tax fines may be imposed.

Any business considering such an option should cover all its bases to ensure that the right decision is being made. Working with an experienced law firm familiar with regulation surrounding such transactions may be helpful.

Source: Treasury.gov, “Fact Sheets: Treasury Actions to Rein in Corporate Tax Inversions,” accessed on March 9, 2015