On Monday, September 22nd, the U.S. Department of the Treasury and the Internal Revenue Service (IRS) published Notice 2014-52 (the “Notice”) announcing their intention to issue regulations that would address corporate inversion transactions. If issued in the form described in the Notice, the regulations would prevent certain narrow categories of inversions, including so-called “spinversions” and transactions involving a foreign company with predominantly passive assets. In most circumstances, however, the rules described in the Notice will only reduce, not eliminate, the tax benefits from an inversion. The precise impact of the rules on a particular proposed transaction will depend on the specific circumstances of the companies involved. The Notice states that its rules will apply retroactively to transactions that were completed on or after September 22, 2014, the date of the publication of the Notice.

In a corporate inversion, the ownership of a U.S. corporate group is restructured in a way that causes the U.S. group to become owned by a non-U.S. parent company. Inversions have a long history, beginning in the 1980s, and previously inspiring anti-inversion regulations in 1995 and legislation in 2004. Under the 2004 legislation, if the former shareholders of the U.S. company own 80 percent or more of the equity of the new foreign parent, the inversion is effectively disregarded, with the new parent being treated as a U.S. corporation for all U.S. income tax purposes. If the former shareholders of the U.S. group own 60 percent or more of the combined group (but less than 80 percent), the non-U.S. status of the new foreign parent is respected, but certain adverse tax rules apply. Although earlier inversions generally involved an internal restructuring of a single U.S. company that redomiciled its parent corporation outside the United States, the recent wave of inversions typically involve mergers of two companies, each with significant business operations, but which nonetheless fall between the 60 percent and 80 percent tests because significant ownership of the combined group is acquired by shareholders of the non-U.S. target company.

Although such inversions involve a significant business combination, they may also provide a number of tax advantages. The principal U.S. income tax benefits from these transactions include: (1) reducing the U.S. taxation of the group’s U.S. operations through the use of arrangements that result in the payment of interest (or other deductible expenses) to a foreign affiliate; (2) providing access to the U.S. group’s “deferred” foreign earnings; and (3) eliminating the residual U.S. taxation of the group’s future earnings from foreign operations.

The Notice seeks to nullify certain inversion transactions.  It also seeks to limit access to deferred foreign earnings.  On the other hand, the Notice does not alter the definition of a pure inversion, the statutory 80 percent ownership threshold remains the standard for nullifying an inversion except in the three narrow circumstances identified in the Notice.  Nor does it address the use of interest deductions to reduce the U.S. tax burden on the company’s U.S. operations, although it does state that Treasury and the IRS “expect to” issue additional guidance addressing inversion, including possibly the U.S. interest deduction, and that this guidance would apply to companies that inverted on or after September 22, 2014.

In sum, while the Treasury Notice is an important chapter in the ever-changing inversions narrative, it is not the end of the story.  The focus now turns to the effect of the Treasury Notice on the several publicly announced deals as well as the possibility of additional transactions in the coming months, and the impact of these developments on the possibility of further action by Congress or Treasury.