MERGER & ACQUISITION LAW UPDATE

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1 MERGER & ACQUISITION LAW UPDATE October 8, 2014 Department of Treasury Rulemaking Enacted to Curb Tax Inversion Transactions On September 22, 2014 the U.S. Department of Treasury announced new rules targeting companies that try to avoid U.S. income taxes by moving their headquarters overseas (a so-called inversion ). The Treasury Department is still fleshing out the details of the guidance but has effectively placed companies on notice that deals that close on or after September 22, 2014 will be subject to new rules issued by the Treasury Department. To better understand the Treasury Department s new rules, some background on inversions is helpful. What policies encourage corporate inversions? Unlike most major countries, the United States taxes corporations on their worldwide income whether the income is earned on domestic or foreign soil. Most other major countries have territorial tax systems that tax corporations on domestic income only. For example, a multinational corporation based in Ireland could shield its non-u.s. income from U.S. taxes and, as an added benefit, avoid paying or pay significantly reduced taxes in Ireland on income earned outside of Ireland. In addition, the combined state and federal corporate tax rate in the U.S. which approaches 40% is much higher than in many other countries, such as Ireland at 12.5%, Iceland at 20% or the United Kingdom at 21%. The disparity in these rates has only widened in recent years as a result of the financial crisis and aggressive tax-cutting measures taken in many countries to encourage corporate growth and job creation. Corporations with overseas income are incentivized now more than ever to keep foreign income overseas and not subject it to higher U.S. tax rates. What is a corporate inversion? To remain competitive and to reduce taxation, some U.S. companies have changed their structure to become foreign-owned firms placed under a new foreign parent company formed in a lower-tax jurisdiction. Such companies still pay taxes to the U.S. government on U.S. income but no longer pay U.S. taxes on foreign income. In addition, some companies engage in a Copyright 2014, Kutak Rock LLP. All rights reserved.

2 process called stripping. Stripping involves the company taking its foreign income and loaning it to its foreign parent or its U.S. operations in an attempt to keep that income foreign and to avoid paying U.S. income taxes on same. Stripping allows the parent entity or its U.S. affiliates to still use the money while charging interest on the loans made to its U.S. operations. Generally, up to now such actions have been legal under U.S. law with minimal restrictions. How have the rules imposed by the U.S. Treasury changed the playing field? The U.S. Treasury has placed several new rules in effect to make inversions less attractive and limit the situations where they can be used effectively. Many experts indicate the new rules are tailored narrowly to reduce, but not eliminate, the use of inversions. The new rules target the ability of inverted companies to gain access to cash stockpiles accumulated from overseas profits without paying U.S. taxes on same. Some of the major rule changes include the following: - So-called hopscotch loans from a foreign subsidiary to the newly inverted foreign parent entity should cease as such loans will now be treated as dividends making them taxable in the U.S. The elimination of hopscotch loans removes a funding source used to finance many inversions. - So-called spin-version transactions have been prohibited. In a spin-version, one U.S. company merges into another international spinoff of a division or subsidiary of another U.S. multinational. Prohibiting spin-versions substantially limits the available merger partners and transactions that could qualify for inversion treatment. - So-called decontrolling transactions in which a company restructures foreign units so they are no longer U.S. controlled will now be barred under the new rules. Where will the legal landscape on inversions head from here? While the new rules chip away at the tax benefits that can be realized through inversions, they do not outlaw inversions. For some U.S. companies, the reduced ability to access foreign profits stockpiled in foreign subsidiaries has been removed making the transactions much less attractive. But for other U.S. companies, inversions may still make sense for a variety of other reasons, not the least of which is the potential benefit of recognizing a lower tax rate on foreign profits even if those profits cannot be brought back into the U.S. Notably, the outright prevention of inversions can be accomplished only by the United States Congress, not simply by Department of Treasury rulemaking. Clearly, the Department of Treasury has sent a strong message to the public markets that companies should proceed cautiously before undertaking an inversion. In addition, the Department of Treasury s actions may raise awareness that significant changes to U.S. corporate tax law are needed before U.S. companies will curtail their use of inversions to remain globally competitive and optimize financial results for their stakeholders. * * * 2

3 Contacting Kutak Rock LLP This publication is provided by Kutak Rock LLP as a service to clients and colleagues. The information contained in this publication should not be construed as legal advice. Questions regarding the matters discussed in this publication may be directed to Matt McElhiney (matt.mcelhiney@kutakrock.com) or any Kutak Rock LLP lawyer listed herein or with whom you have consulted in the past on similar matters. If you have not received this publication directly from us, you may obtain a copy of any past or future related publications from Jodi L. Kopke ( ; jodi.kopke@kutakrock.com) in our Denver office. Disclaimer per Missouri Rules of Professional Conduct: The choice of a lawyer is an important decision and should not be based solely upon advertisements. This communication may be considered advertising in some jurisdictions. About Kutak Rock LLP Kutak Rock LLP is a national law firm of more than 500 lawyers in 17 locations from coast to coast. Our M&A team consists of more than 50 attorneys. While our M&A representations span from Fortune 100 companies to smaller transactions, we have developed a significant niche practice in Middle Market M&A, especially those with an enterprise value of $25-$750 million. Kutak Rock LLP Contacts Name Office Phone Number Michael W. Alvano Omaha (402) Steven P. Amen Omaha (402) Marcantonio Barnes Washington D.C. (202) Paul E. Belitz Denver (303) Glenn E. Borkowski Little Rock (501) Jennifer S. Brown Kansas City (816) Michael K. Bydalek Omaha (402) Brian V. Caid Denver (303) Robert L. Cohen Omaha (402) James C. Creigh Omaha (402) David C. Cripe Denver (303) Mark A. Ellis Omaha (402) Edward P. Gonzales Omaha (402)

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