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An Overview of the Recent Changes in Merger and Acquisitions Law

Updated on January 9, 2018
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Tamara Wilhite is a technical writer, industrial engineer, mother of 2, and a published sci-fi and horror author.

An Overview of M&A Legal Changes

The M&A laws US companies face have changed when the government thinks that the merger, acquisition or inversion is an effort to reduce its tax rate.

Tax inversions took off after 2010. These tax inversions occur when companies based on one country buy firms in another country where taxes are lower, and then state that the newly acquired entity is merged into a new company, subject to the laws of the purchased firm and lower tax rate.

While the double Irish arrangement and Dutch sandwich have been known for years in M&A laws US firms have been able to take advantage of, new rules and regulations have been put in place to make them harder to utilize.

In 2014, the Obama administration tightened rules to make it harder for companies to move their legal headquarters to lower tax nations. These rules included making it harder to gain access to deferred earnings of the foreign subsidiaries without paying US taxes on the money, as well as requiring the US company to own less than 80% of the merged firm.

In November, 2015, the bar was set even higher. The US parent company had to have an ownership stake of 60% or less. The M&A laws US companies face became insanely complex at the end of 2015, because the Treasury said companies with an ownership stake of 60% to 80% are now treated differently and may face adverse tax consequences. The higher US tax rate may also apply if at least a quarter of the new entity’s business doesn’t take place in the home country of the new foreign parent, a measure intended to prevent foreign companies from having a majority stake in US firms while avoiding the highest corporate tax rate in the world. And if the US firm had an 80% or higher ownership stake, it was now taxed at American tax rates regardless of where the headquarters were located.

Third country inversion rules became even more onerous. For example, as of late 2015, inversions where a US company combined with a smaller foreign firm with a tax resident in a third country became much more difficult. This is intended to stop the “double Irish with a Dutch sandwich” loophole to merge with an Irish subsidiary, Dutch financial transfers and a home address in a low tax rate nation that allowed some firms to pay almost no corporate income taxes and none in the US even if a sizable minority or even majority of sales took place there.

The problem with the M&A law changes are the threats of penalties levied by taxing authorities to merged entities that were in compliance with the law at the time the rule changes were made, and pressure to pay fines or sell off part of their ownership to foreign entities – and the 2015 rules make it impossible to inflate the value of foreign assets to meet the 80% foreign ownership requirement.

The Obama administration put up more barriers to international mergers between 2014 and 2016 than it had since 2008.
The Obama administration put up more barriers to international mergers between 2014 and 2016 than it had since 2008. | Source

Several high profile mergers in the works were put on hold because the merged entity wouldn’t meet the lower ownership threshold or sales rules. More importantly, the rule changes mean that companies that went through an inversion in the past few years with a foreign firm may no longer be considered foreign and taxed at the higher US rate.

If you are considering a foreign merger or acquisition or have made one in the past few years, consult with an expert in US M&A laws to avoid legal problems or a hefty fine by the IRS.

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