18th Cross Atlantic and European Tax Symposium

Jonathan Cooklin – Davis Polk & Wardwell LLPNicolas de Boynes – Sullivan & Cromwell LLPStephen Fiamma – Allen & Overy LLP

21st November, 2014

Corporate Inversions and Migrations

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INVERSIONS: THE U.S. PERSPECTIVE

“An inversion is a transaction through which the corporate structure of a U.S.-based multinational group is altered so that a new foreign corporation, typically located in a low-or-no-tax country, replaces the existing U.S. parent corporation as the parent of the corporate group.” Corporate Inversion Transactions: Tax Policy Implications, Office of Tax Policy, Department of the Treasury (May 2002).

Can be accomplished by transfers of shares or assets to a non-U.S. company

Objective: to mitigate tax and compliance costs of an U.S.-headed international group

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INVERSIONS/MIGRATIONS INVOLVING EU COMPANIES

Different options:

Transfer of corporate seat in another EU State (with or without transfer of assets/functions)

Tender-offer launched by a foreign company

Cross-border merger into another EU company (with or without transfer of assets/functions)

Different objectives:

Transfer of corporate tax basis is generally restricted by EU Directive/case law

Objectives vary depending on the State of origin of the corporation

Withholding on dividends is often a key element to decide the location of the parent company

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INVERSIONS: THE EUROPEAN PERSPECTIVE PARTYGAMING PLC AND BWIN INTERACTIVE ENTERTAINMENT AGEU CROSS BORDER MERGER BY ABSORPTION

Shareholders

TRANSFEROR SUCCESSOR

Shareholders

DISSOLVEDWITHOUT

GOING INTOLIQUIDATION

LISTED ONTHE L.S.E.

Transfer of assets and liabilities

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GREENCORE AND NORTHERN FOODSPROPOSED EU CROSS BORDER MERGER BY ABSORPTION

Shareholders

TRANSFEROR SUCCESSOR

Shareholders

DISSOLVEDWITHOUT

GOING INTOLIQUIDATION

LISTED ONTHE L.S.E.

Transfer of assets and liabilities

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U.S. INVERSIONS: ABBVIE/SHIRE

Shareholders Shareholders

AbbVie(U.S.)

Shire(Jersey)

U.S. SUBSNon-U.S.

SUBSSUBS

Shareholders Shareholders

New AbbVie(Jersey)

AbbVie(U.S.)

U.S. SUBSNon-U.S.

SUBS

Shire(Jersey)

SUBS

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U.S. Tax Advantages of an Inversion

Escape from subpart F/CFC anti-deferral regime

Access to cash trapped in non-U.S. subsidiaries without triggering current U.S. taxation

Elimination of dividend withholding tax on payments to non-U.S. shareholders

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U.S. Response to Inversions

Section 367

Immediate and ongoing taxation of transfers to non-U.S. entities

Section 7874

Inhibitions on post-inversion reorganizations/loss of inversion benefits

Notice 2014-52

Widening of scope of sections 367 and 7874

Limitations on tax-free use of foreign subsidiary cash

Limitations on decontrolling CFCs

Expansion of section 304

Possible legislative change

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INVERSION THROUGH A TENDER-OFFER

Stock tender offer

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TRANSFER OF CORPORATE SEAT WITHIN THE EU

National Grid (2011)

Immediate collection of tax on latent gains is a disproportionate restriction

Com v. Portugal (2012) – Adv. Gen. Mengozzi

“Staggered taxation on annual maturities or as capital gains are realized” is appropriate and proportionate

Com v. Denmark (2013)

“A taxable event other than the effective disposal” would be acceptable given that certain assets, such as operational assets or goodwill, are never disposed of

Letter from the Commission to the Danish government dated 21 January 2014: A distinction has to be made between assets meant to be disposed of and assets not meant to be disposed of; no minimum fixed tax instalments; no interest

DMC (2014) – Note: this case does not directly address transfers of corporate seat

Staggered taxation over five years is satisfactory and proportionate given the risk of non-collection of the tax (but a guarantee requested by the tax authorities is not)

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TRANSFER OF CORPORATE SEAT WITHIN THE EU (cont.)

Benefits of the SE form:

Continuity of the legal personality

Unanimity vs. qualified majority

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UK INVERSIONS

TOPCO

PLC

Trust

UK SUBS NON-UK SUBS

INCOME ACCESS SHARE

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WHERE TO GO

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POST INVERSION PLANNING

PLANNING

CFC Planning

IP Restructuring

Finance structure

Reinsurance treaties

Transfer businesses

offshore

Establish new business offshore

Service companies

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INVERSIONS: THE U.K.’S RESPONSE

Territorial/exemption tax system

No tax on disposal of trading subsidiaries (the “substantial shareholding exemption”)

No tax on receipt of dividends from subsidiaries

Can elect for non-U.K. branches to be exempt from U.K. corporation tax

Controlled foreign companies (“CFC”) regime generally only bites if profits are artificially diverted from the U.K.

21% corporate tax rate (20% from April 2015)

Although a U.K. resident holding company is unlikely to have material taxable income

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INVERSIONS: THE U.K.’S RESPONSE (contd)

Intellectual Property Patent Box

10% tax rate when fully implemented

No withholding tax on payment of dividends (other than REIT dividends) irrespective of the location of the shareholder

Access to a very broad double tax treaty network

Accordingly, dividends from a U.S. subsidiary to a U.K. parent may often be paid without U.S. withholding tax

Access to the benefits of EU Directives for a U.K. incorporated parent

Minimises withholding tax on dividends, interest and royalties from EU subsidiaries

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U.K. INVERSIONS

Not so much “Desertion” as “Absent Without Leave”

Welcome back

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DOUBLE INVERSIONS: GTECH S.P.A AND INTERNATIONAL GAME TECHNOLOGY

NEW U.K.HOLDCO

U.S. MERGER SUB

IGT (U.S.)

GTECH(ITALY)

Merger with and into

Merger with

and into

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PUBLICIS/OMNICOM

HoldCo NV(Resident in the UK)

MergerCo US

Merger

Merger