In an inversion, a United States-based multinational replaces its U.S. parent with a foreign parent to minimize or avoid U.S. taxation on some or all profits. Now, the Treasury Department is taking steps to restrain and eventually eliminate this practice by reducing the economic benefits.
Treasury’s strategy is to keep inverted businesses from accessing the foreign subsidiaries’ overseas earnings without paying U.S. tax. Among the approaches will beto prevent the use of “hopscotch loans” which involve repatriating foreign earnings by having controlled foreign corporations make loans to their new foreign parent, instead of the U.S. parent.
Treasury will also act to prevent a decontrolling strategy where the new foreign parent buys enough stock in the controlled foreign corporation to take control away from the former U.S. parent. This gives the foreign parent access to the deferred earnings of the foreign subsidiary without paying tax. These rules apply to deals closed on September 22, 2014 and thereafter.