Inversion Transactions: Structuring Deals to Capture Tax Benefits - PowerPoint PPT Presentation

Presenting a live 90-minute teleconference with interactive Q&A Inversion Transactions: Structuring Deals to Capture Tax Benefits and Manage Post-Merger Integration WEDNES DAY, OCTOBER 1, 2014 1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific Today’s faculty features: William Amon, Managing Director, Andersen Tax , Los Angeles . Wei, Attorney, Cadwalader Wickersham & Taft , New Y Edward S ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .

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Inversion Transactions: Structuring Deals to Capture Tax Benefits and Manage Post-Merger Integration Bill Amon bill.amon@andersentax.com Edward S. Wei edward.wei@cwt.com October 1, 2014

Topics • I. Structure of a merger inversion transaction – Types of inversions – Section 7874 • II. Capturing the benefits of an inversion – Limiting US taxation – Non-US earnings to acquire US businesses – Base erosion techniques • III. Post-merger integration and restructuring – Future management – Direction and geographical presence of the combined entity – Regulatory approvals from countries involved – Integration of the two businesses 6

I. Structure of a merger inversion transaction A. Types of inversions B. Section 7874 7

Primary tax considerations • Inversion structures • Tax benefits • Section 7874 • Regulatory risk • Shareholder level taxation • Excise tax applicable to officers and directors 8

Types of Inversion Structures • 1. Full Company Two-Party Inversions • 2. Full Company One-Party Inversions • 3. Carve-Out Inversions (No Spinoff) • 4. Carve-Out Inversions (Spinoff) 9

1. Full Company Two-Party Inversions Simplified Illustrative Transaction Key Considerations Pre-Acquisition Structure  Prior to an inversion: US Co IRE Co  US Co foreign subs may hold “trapped Shareholders Shareholders cash” that has been earned abroad.  Trapped cash that is repatriated may be used to repurchase stock, issue dividends or acquire companies, but repatriation may result in US corporate income tax without an inversion.  Prior to repatriation, US accounting rules provide an exception to recognizing taxes on undistributed US Co IRE Co earnings of foreign subs if the earnings are permanently reinvested abroad.  US Co may instead “access” a portion of the trapped cash by borrowing. Subs Subs  US Co’s foreign subs are generally subject to the US CFC regime.  Benefits of intercompany debt are limited. 10

1. Full Company Two-Party Inversions Simplified Illustrative Transaction Key Considerations Newco Structure  Irish Newco may be owned by nominees prior to the inversion.  Foreign company target does not need Irish Newco to be in the same jurisdiction as Newco for inversion to occur.  Common jurisdictions of Newco include HoldCo Ireland, UK, Netherlands and Canada. (Here, Ireland is used by way of illustration.)  HoldCo Choice of jurisdiction is typically based on a variety of tax and non-tax factors.  The use of intermediate holding companies may be necessary for Merger Sub inversion structuring as well as post- closing tax planning. 11

1. Full Company Two-Party Inversions Simplified Illustrative Transaction Post-Acquisition Structure IRE Co US Co Shareholders Shareholders Key Considerations  < 80% Irish Newco acquires IRE Co, e.g. , > 20% through a scheme of arrangement. Irish Newco  IRE Co shareholders typically receive Irish Newco stock resulting in more than 20% of the vote and value of Irish HoldCo IRE Co Newco.  Merger Sub merges with and into US Co with US Co surviving. Subs HoldCo  US Co shareholders typically receive Irish Newco stock resulting in less than 80% of the vote and value of Irish US Co Newco. Subs 12

2. Full Company One-Party Inversions Simplified Illustrative Transaction Key Considerations Pre-Acquisition Structure  Prior to the change in law relating to the substantial business activities test, full US Co Shareholders company one-party inversions were more common.  US Co forms Irish Newco, which forms Merger Sub. US Co Irish Newco Subs Merger Sub 13

2. Full Company One-Party Inversions Simplified Illustrative Transaction Key Considerations Post-Acquisition Structure  Merger Sub merges with and into US Co with US Co surviving. US Co Shareholders  US Co shareholders receive 100% of the Irish Newco stock.  Typically, this structure is used only if Irish Newco the Irish Newco group has substantial business activities in Ireland (or, if Newco is in a different jurisdiction, the relevant jurisdiction of Newco). US Co  This structure has been rarely used in the most recent wave of inversions. Subs 14

3. Carve-Out Inversions (No Spinoff) Simplified Illustrative Transaction Key Considerations Pre-Acquisition Structure  Carve-out transactions may provide for a means to effect a transaction when US Co IRE Co Shareholders Shareholders the economics would not otherwise make sense.  Transactions may be possible with a domestic acquirer and target. US Co IRE Co Subs Asset 1 Asset 2 15

3. Carve-Out Inversions (No Spinoff) Simplified Illustrative Transaction Post-Acquisition Structure US Co IRE Co Shareholders Key Considerations > 20%  < 80% IRE Co transfers Asset 1 to Irish Newco in exchange for Irish Newco stock. Irish Newco Asset 2  IRE Co typically receives Irish Newco stock resulting in more than 20% of the vote and value of Irish Newco. HoldCo Asset 1  Merger Sub (not pictured) merges with and into US Co with US Co surviving.  US Co shareholders typically receive HoldCo Irish Newco stock resulting in less than 80% of the vote and value of Irish Newco. US Co Subs 16

4. Carve-Out Inversions (Spinoff) Simplified Illustrative Transaction Key Considerations Pre-Spin-off/Acquisition Structure  Carve-out inversions involving a first step spinoff, followed by a merger with US Co Foreign Co a third party may be possible. Shareholders Shareholders  Because of the complexity of these transactions, these transactions do not occur often.  Alternatively, it may be possible for a US Co to spinoff a company, followed by a one party inversion of the company (though this is uncommon). Foreign Co US Co Foreign Foreign Subs Business 1 Business 2 17

4. Carve-Out Inversions (Spinoff) Simplified Illustrative Transaction Key Considerations Post-Spin-off Structure  The spinoff may or may not be tax-free for US and foreign tax purposes. To the US Co Foreign Co extent the spinoff is intended to be tax- Shareholders Shareholders free for US tax purposes, additional requirements must be met and step transaction principles must be considered.  Foreign corporate and tax limitations may apply, e.g. , certain requirements may need to be met before distributions may be made. Foreign Foreign Co US Co Business 2 Foreign Subs Business 1 18