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Ireland to End Double Irish Tax Loophole used by many US Companies

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Less than a month ago, Irish Finance Minister Michael Noonan announced in an address introducing the 2015 budget to the Irish parliament that the country will be changing its tax code to require all companies registered in Ireland to be tax residents, thereby ending the so-called Double Irish loophole utilized by many US companies and multinationals to reduce their tax liabilities. Noonan was quoted in one recent article as stating, “Aggressive tax planning by the multinational companies has been criticized by governments across the globe, and has damaged the reputation of many countries.”

This article will briefly examine the Double Irish structure used by US companies and others, and the new changes that will affect this structure; this article is not intended to convey tax or legal advice under either US or Irish laws.

The changes to the Double Irish loophole, combined with the recent Department of the Treasury and Internal Revenue Service Notice 2014-52, “Rules Regarding Inversions and Related Transactions” will significantly affect many US companies. Tax planning and compliance will become even more important the days ahead. Please contact Mr. Eugene Sherayzen, an experienced international tax attorney at Sherayzen Law Office, PLLC for questions about your tax and legal needs.

The Double Irish Loophole

Before the new changes, multinationals could utilize a structure commonly referred to as the “Double Irish”. In general, under the Double Irish structure, companies would take advantage of Irish territorial taxation laws, meaning that the income of an Irish subsidiary operating outside of Ireland would not be subject to taxation. Prior to the new change, an entity in Ireland would be considered to be a tax resident not where it was incorporated, but rather where its controlling managers were located; thus, an entity registered in Ireland with its managers located in a tax haven would be considered to be a tax resident of the tax haven, and not Ireland, if properly structured.

US companies would often take advantage of this structure by forming offshore subsidiary entities that would own the rights to intellectual property located outside the United States, typically without paying US tax, through a cost sharing agreement between US parents and offshore companies. The non-US intellectual property rights would then be licensed to a second Irish subsidiary (hence the “Double Irish” phrase), which would be an Irish tax resident, generally in return for royalty payments, or similar fees. The second Irish subsidiary would additionally be able to deduct the royalties or other fees paid to the entity in the tax haven, thereby reducing its taxable profits (and subjecting any remaining profits to Ireland’s competitive 12.5% rate). Until such profits were remitted to the US, they would typically not be subject to US taxation.

Many US companies, such as LinkedIn, Facebook, Google, Twitter and others successfully used the Double Irish loophole to reduce their overall tax liabilities.

Ending the Double Irish Loophole

Under the new changes to the Double Irish loophole, beginning in January of 2015, all newly Irish-registered entities will automatically be deemed to be Irish tax residents. The new rules will not apply to companies currently utilizing the Double Irish structure; however, such companies will need to be compliant with the new rules by the end of 2020. Ireland will still retain its favorable 12.5% corporate tax rate.

The changes to the Double Irish loophole were made as a result of intense international criticism and potentially adverse consequences for Ireland. This year, the European Commission announced that it would conduct a formal investigation into the practices of various companies with Irish subsidiaries, including the Double Irish loophole. According to various news reports, European Union officials have expressed preliminary support for the new changes.

To address the possible loss of jobs resulting from the new changes (one news report puts the number of jobs created by foreign firms registering in Ireland to be 160,000 jobs, or approximately one in ten workers in the country – a lot of these jobs were created as a result of the Double Irish loophole), Noonan announced that he intended to create a new taxable rate for income derived from intellectual property in the form of a “Knowledge Development Box”. However, the EU is currently investigating so-called “patent boxes” (which could likely be similar to Noonan’s future proposal) utilized by various other European countries, such as the U.K. and the Netherlands.

Contact Sherayzen Law Office for Professional Help With International Tax Planning

Since 2008, the world has experienced an almost unprecedented surge in the international tax enforcement, reflecting the desire (and the great economic need) of many countries to be able to obtain what these countries consider their fair share of tax revenues from international companies. The recent change to Irish tax laws with respect to the Double Irish loophole is just the latest example of this growing trend.

As tax enforcement rises, many US companies operating overseas and foreign companies operating in the United States are facing increasing risks of over-taxation with a direct threat to their profitability. For a number of reasons, the mid-size and small companies that operate internationally face a disproportionate increase in these risks than large multinational companies.

Sherayzen Law Office has successfully helped companies around the world to successfully operate internationally while reducing the risks of being subject to unfair tax treatment. If you have a small or mid-size business that operates internationally, you should contact our international tax team for professional legal and tax help.

Are the new IRS Inversion Regulations in Notice 2014-52 Working?

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” in the wake of recent inversions.

In previous articles on Hopscotch loans and de-control of CFCs, we covered certain aspects of the new regulations to be issued. This article will examine some of the changes that various corporations have recently made to pending inversions as a consequence of the new IRS Notice 2014-52; the article is not intended to convey tax or legal advice. Please contact Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

IRS Notice 2014-52 Intended to Address Tax Avoidance

As stated in Notice 2014-52, Treasury and the IRS “understand that certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion.” Such inversions were viewed to be specifically inconsistent with the purposes of Internal Revenue Code (“IRC”) Section 7874 and 367, and accordingly, Treasury and the IRS intend to issue new regulations under IRC Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874. After Notice 2014-52 was issued, Treasury Secretary Jacob Lew was quoted as saying that the new regulations would “significantly diminish the ability of inverted companies to escape U.S. taxation.” Treasury and the IRS are also “considering guidance to address strategies that avoid U.S. tax on U.S. operations by shifting or “stripping” U.S.-source earnings to lower-tax jurisdictions, including through intercompany debt.” Notice 2014-52 is currently in the comment period.

At Least One Inversion Deal Cancelled

On October 3, 2014, the Raleigh, North Carolina-based Salix Pharmaceuticals Ltd, announced that it would be cancelling a deal to merge with an Irish subsidiary of the Italian company, Cosmo Pharmaceuticals SpA, specifically referencing Notice 2014-52 as creating “more uncertainty regarding the potential benefits we expected to achieve.”

Notice 2014-52 appears to have sufficiently created its intended result in this case. The CEO for Cosmo, Alessandro Della Cha, was quoted in an article as saying, “The (U.S.) administration has taken steps to make inversions more difficult and to make it harder to extract the benefits.”

Scuttling the deal was particularly costly for Salix as it also had to pay Cosmo a break-up fee of $25 million; however, according to various reports, the company has also been sought for a potential deal by Allergan Inc. as well as a Actavis Plc.

Medtronic Adjusts Deal in Response to Notice 2014-52

Unlike the response that Salix took to Notice 2014-52, Minnesota-based Medtronic Inc. recently announced that it would still close the proposed deal to acquire Ireland-based Covidien Plc by the end of this year, or early next year.

However, instead of the originally-proposed deal to use cash from its foreign subsidiaries to purchase the company, it will borrow $16 billion to close the approximately $43 billion transaction. As with Salix, a spokesman for Medtronic cited Notice 2014-52 as the reason for the change in the terms of the transaction.

As tax experts study proposed deals under the new IRS rules, it is very likely that more companies planning inversions will adjust their deals in a similar manner.

Contact Sherayzen Law Office for Professional Help with Complex International Tax Planning

Notice 2014-52 is just the latest in the avalanche of recent IRS initiatives in international tax enforcement. The recent explosion in the number of international tax regulations has greatly complicated the ability of US persons conduct business overseas. This is why you are advised contact Mr. Eugene Sherayzen an experienced international tax attorney at Sherayzen Law Office, Ltd. for professional legal and tax guidance in this increasingly complex area of law.

Guilty Plea for Failure to Report Income from Undeclared UBS Account

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On October 20, 2014, the Justice Department and the IRS announced that Menashe Cohen pleaded guilty in the U.S. District Court for the District of New Hampshire to filing a false federal income tax return for tax year 2009. In addition, Mr. Cohen has agreed to resolve his civil liability for failure to report his financial interest in the undeclared UBS account on a FBAR by paying a 50 percent civil penalty to the IRS based on the high balance of his ownership of the undeclared UBS account.

Main Facts of the Case

According to court documents, Mr. Cohen, an oriental carpet dealer, and his sister maintained an undeclared UBS account in Switzerland that had a balance of approximately $1.3 million. Mr. Cohen also maintained bank accounts in Israel and in Jersey, a British Crown dependency located in the Channel Islands off the coast of Normandy, France. It appears that the defendant did report the Israeli and Jersey account on his 2009 FBAR, but he failed to report his financial interest in the undeclared UBS account in Switzerland. In total, for tax years 2006 through 2009, Cohen failed to report approximately $170,000 in income earned from offshore bank accounts.

The actual guilty plea, however, is related only to the 2009 tax return where Mr. Cohen reported only $350 in interest income, when in fact he had received approximately $66,500 in interest from his undeclared UBS account.

Mr. Cohen faces a statutory potential maximum sentence of three years in prison and a maximum fine of $250,000 at his January 26, 2015, sentencing.

Case Highlights

Mr. Cohen’s case is actually quite troubling because it involves a criminal pursuit of an owner with an undeclared UBS account even though many of the usual criminal facts are not present in the case.

There was no complex tax planning with an intention to conceal the ownership of the undeclared UBS account. The balance on the undeclared UBS account is on the milder side ($1.3 million is not a small amount of money, but the criminal cases tend to concentrate in the amount higher than $3 million); in this case, half of the undeclared UBS account was not even owned by Mr. Cohen, but his sister. Finally, the under-reported amount of interest from the undeclared UBS account was not such a large amount as to normally warrant criminal prosecution.

It appears that two factors steered this case toward criminal prosecution. First, partial FBAR reporting – the fact that Mr. Cohen reported two out of three accounts gave rise to the inference that he acted willfully with respect to his undeclared UBS account.

Second, it appears that the under-reporting of income might have involved all three accounts, not just the undeclared UBS account. If this was the case, then it might have a been a contributory factor in favor of the prosecution as well.

The Importance of the Case to Other Taxpayers With Undeclared Foreign Accounts

Mr. Cohen’s case with respect to his undeclared UBS account contains a strong warning to other US taxpayers with undeclared foreign accounts – it appears that the IRS is now willing to prosecute cases involving lower dollar amounts than in the past. While an undeclared UBS account has its special negative connotations in US tax enforcement, it does appear that there is a growing trend toward criminal prosecution of under-reported foreign income as long as the IRS is comfortable with being able to establish willfulness with respect to FBAR non-reporting.

This means that the taxpayers with balances under $1 million on their undeclared foreign accounts should not take the risk of criminal prosecution lightly. The exact probability of a criminal prosecution should be determined by an international tax lawyer based on the particular facts of a taxpayer’s case.

Contact Sherayzen Law Office for Professional Help with the Voluntary Disclosure of Your Foreign Accounts

If you have undeclared foreign accounts, you should contact Sherayzen Law Office for legal and tax help. We are a team of highly experienced tax professionals who will thoroughly analyze, determine the proper path of your voluntary disclosure, and prepare all of the necessary legal and tax documents. Once your voluntary disclosure is filed, our international tax firm will be there to defend your case against the IRS.

Contact Us Now to Schedule Your Confidential Consultation.

New IRS Regulations to Address Transactions to De-Control CFCs

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” (“Notice”) in the wake of the recent wave of inversions. In a previous article, we covered the new regulations to be issued regarding Internal Revenue Code (“IRC”) Section 956 so-called “Hopscotch loans” and related transactions. In this article, we will examine the new Treasury and IRS regulations to be issued to address transactions to de-control or significantly dilute controlled foreign corporations (“CFCs’”) under Notice Section 3.02.

This article is intended to provide explanatory material regarding the new inversion regulations as they relate to IRC Section Sections 954, 964, and 367 de-control aspects; the article does not convey legal or tax advice. Please contact the experienced international tax law practice of Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

Transactions to De-Control or Significantly Dilute CFCs

In general, foreign subsidiaries of acquired U.S. corporations will continue to hold CFC status following most expatriation transactions; such status makes these CFCs subject to U.S. taxation under the IRC subpart F provisions. Prior to the Notice, however, companies could structure inversions so that the newly-formed foreign parent would purchase sufficient stock in order to remove control (or “de-control”) of an expatriated foreign subsidiary away from the former U.S. parent company so that the foreign subsidiary would no longer be treated as a CFC.

By ceasing to be a CFC, as noted in the Notice, companies could thus “Avoid the imposition of U.S. income tax, so as to avoid U.S. tax on the CFC’s pre-inversion earnings and profits. For example, after an inversion transaction, a foreign acquiring corporation could issue a note or transfer property to an expatriated foreign subsidiary in exchange for stock representing at least 50 percent of the voting power and value of the expatriated foreign subsidiary. The expatriated foreign subsidiary would stop being a CFC, and the U.S. shareholders would no longer be subject to subpart F of the Code with respect to the expatriated foreign subsidiary…” Such an effect could also be achieved if the foreign acquiring corporation acquired enough stock to substantially dilute a U.S. shareholder’s ownership of the CFC; U.S. taxation of the CFC’s pre-inversion earnings and profits could be avoided if the CFC later redeemed on a non-pro rata basis, its stock held by the foreign acquiring corporation. (The Notice also provides other similar examples of pre-Notice tax avoidance strategies).

Regulations to Address Transactions to De-Control or Significantly Dilute CFCs

In response to the concerns addressed in the previous paragraphs, under Notice Section 3.02, Treasury and the IRS will issue regulations under IRC Section 7701(l) to “Recharacterize certain transactions that facilitate the avoidance of U.S. tax on the expatriated foreign subsidiary’s pre-inversion earnings and profits”, and they also intend to issue new regulations to modify the application of IRC Section 367(b) in order to require, “[I]ncome inclusion in certain nonrecognition transactions that dilute a U.S. shareholder’s ownership of a CFC.”

Under IRC Section 7701(l), Treasury and the IRS intend to issue regulations providing that a “specified transaction” will be recharacterized under the procedures of the Notice. A specified transaction is defined to be a, “[T]ransaction in which stock in an expatriated foreign subsidiary… is transferred (including by issuance) to a ‘specified related person.’” A specified person is defined to mean a, “[N]on-CFC foreign related person… a U.S. partnership that has one or more partners that if completed during is a non-CFC foreign related person, or a U.S. trust that has one or more beneficiaries that is a non-CFC foreign related person.”

Under the Notice, “if an expatriated foreign subsidiary issues specified stock to a specified related person, the specified transaction will be recharacterized as follows: (i) the property transferred by the specified related person to acquire the specified stock (transferred property) will be treated as having been transferred by the specified related person to the section 958(a) U.S. shareholder(s) of the expatriated foreign subsidiary in exchange for instruments deemed issued by the section 958(a) U.S. shareholder(s) (deemed instrument(s)); and (ii) the transferred property or proportionate share thereof will be treated as having been contributed by the section 958(a) U.S. shareholder(s) (through intervening entities, if any, in exchange for equity in such entities) to the expatriated foreign subsidiary in exchange for stock in the expatriated foreign subsidiary.” (See Notice for further information).

Further, under IRC Section 367(b), Treasury and the IRS also intend to amend the section’s regulations, in general, to require that “an exchanging shareholder described in §1.367(b)-4(b)(1)(i)(A) will be required to include in income as a deemed dividend the section 1248 amount attributable to the stock of an expatriated foreign subsidiary exchanged in a “specified exchange”. A specified exchange is defined to mean an exchange “in which a shareholder of an expatriated foreign subsidiary exchanges stock in the expatriated foreign subsidiary for stock in another foreign corporation pursuant to a transaction described in §1.367(b)-4(a).” Exceptions may be applicable in certain cases under the Notice. (See Notice for more details).

Effective Date for Notice Section 3.02(e)

The effective dates of Notice Section 3.02(e) will apply to specified transactions and specified exchanges (see definitions above) completed on, or after, September 22, 2014 (but only if the inversion transaction is completed on, or after, September 22, 2014). The Notice is currently in the comment period.

Contact Sherayzen Law Office for Complex International Tax Planning

With the new Treasury and IRS Notice, the need for successful international tax and legal planning will only increase. If you need legal and tax assistance, please contact Attorney Eugene Sherayzen at Sherayzen Law Office, Ltd. for questions about your tax and legal needs.

IRS Notice 2014-52 Regarding Inversions and “Hopscotch Loans”

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On September 22, 2014, the Department of the Treasury (“Treasury”) and the Internal Revenue Service (“IRS”) issued Notice 2014-52, “Rules Regarding Inversions and Related Transactions” (“Notice”) in the wake of recent inversions conducted by many US companies such as by Medtronic, Chiquita Brands, Pfizer and others.  Treasury and the IRS highlighted in the Notice that they were “concerned that certain recent inversion transactions are inconsistent with the purposes of sections 7874 and 367 of the Internal Revenue Code… certain inversion transactions are motivated in substantial part by the ability to engage in certain tax avoidance transactions after the inversion that would not be possible in the absence of the inversion.”

To address these concerns regarding inversions, Treasury and the IRS announced in the Notice that they intend to issue new regulations under Internal Revenue Code (“IRC”) Sections 304(b)(5)(B), 367, 956(e), 7701(l), and 7874. In this article we will briefly explain the new regulations intended to be issued under IRC Section 956 that seek to prevent the avoidance of tax in this section “[T]hrough post-inversion acquisitions by controlled foreign corporations (“CFC’s”) of obligations of (or equity investments in) the new foreign parent corporation or certain foreign affiliates”. Such obligations are also commonly referred to as “Hopscotch loans”. Notice Section 3.01, “Regulations to Address Acquisitions of Obligations and Stock that Avoid Section 956” specifically addresses such issues.

This article is intended to provide explanatory material regarding the new inversion regulations as they relate to IRC Section 956 aspects; the article does not convey legal or tax advice. Please contact experienced international tax attorney Eugene Sherayzen for questions about your tax and legal needs.

Inversions and the Use of “Hopscotch Loans” to Avoid U.S. Taxation under Pre-Notice Rules

In general, under IRC Section 956, if a CFC subsidiary of a U.S. parent makes a loan to (or equity investment in) the U.S. parent, it will be treated as a deemed repatriation of the CFC’s earnings and profits, even though no actual dividend may be distributed. IRC Section 956(c)(1) specifically provides that U.S. property is “[A] any property acquired after December 31, 1962, which is… (B) stock of a domestic corporation; (C) an obligation of a United States person…” (See Section 956 for additional definitions of “U.S. property” for the purposes of this provision).

This deemed repatriation will be taxable to the CFC’s U.S. shareholders. As stated in the Notice, the taxable amount for any taxable year is the lesser of, “(1) the excess (if any) of—(A) such shareholder’s pro rata share of the average of the amounts of United States property held (directly or indirectly) by the controlled foreign corporation as of the close of each quarter of such taxable year, over (B) the amount of earnings and profits described in section 959(c)(1)(A) with respect to such shareholder, or (2) such shareholder’s pro rata share of the applicable earnings of such controlled foreign corporation.”

This is why many U.S. parents and CFC subsidiaries sought to avoid taxation by doing inversions in which new foreign parent companies would be formed that were not CFCs; the existing CFC would then make a loan to the new foreign parent (the “Hopscotch loan”), and the amount could at some future point then be lent to the former U.S. parent. As Treasury and the IRS stated in the Notice, “The ability of the new foreign parent to access deferred CFC earnings and profits would in many cases eliminate the need for the CFCs to pay dividends to the U.S. shareholders, thereby circumventing the purposes of section 956.”

Changes to Inversions under Notice 2014-52, Section 3.10(b)

Under IRC Section 956(e) the Treasury Secretary is directed to prescribe regulations to prevent tax avoidance of the provisions of section 956 through reorganizations or otherwise, and the Notice specified that inversions constitute such transactions. To address the inversions strategy, Treasury and the IRS noted that they intend to issue regulations, “[P]roviding that, solely for purposes of section 956, any obligation or stock of a foreign related person (within the meaning of section 7874(d)(3) other than an “expatriated foreign subsidiary”) (such person, a “non-CFC foreign related person”) will be treated as United States property within the meaning of section 956(c)(1) to the extent such obligation or stock is acquired by an expatriated foreign subsidiary during the applicable period (within the meaning of section 7874(d)(1)).”

An “expatriated foreign subsidiary” is defined in the Notice (except as provided in the succeeding paragraph) as a “CFC with respect to which an expatriated entity… is a U.S. shareholder”, but it does not include a “CFC that is a member of the EAG immediately after the acquisition and all transactions related to the acquisition are completed (completion date) if the domestic entity is not a U.S. shareholder with respect to the CFC on or before the completion date” (“EAG” is defined in the Notice to mean an “expanded affiliated group”). Additionally, under the Notice, “[A]n expatriated foreign subsidiary that is a pledgor or guarantor of an obligation of a non-CFC foreign related person under the principles of section 956(d) and §1.956-2(c) will be considered as holding such obligation.”

Effective Dates of the New Regulation Concerning Inversions

Subject to certain exceptions, the regulations under Notice section 3.01(b), “[W]ill apply to acquisitions of obligations or stock of a non-CFC foreign related person by an expatriated foreign subsidiary completed on or after September 22, 2014, but only if the inversion transaction is completed on or after September 22, 2014.”

Contact Sherayzen Law Office for Help With International Tax Matters

International tax matters often involve very complex issues, and it is advisable to seek the assistance of a tax attorney in this area. If you have questions regarding taxation of CFC’s, are in need of international tax planning, or have any other tax and legal questions, please contact Sherayzen Law Office, Ltd.