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Update on International Tax Developments

August 2015

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Germany-Exit Tax for EU Member States

The European Union was established to create a single economic power made up of member states. A key component was free trade and “freedom of establishment” as set forth in Article 49 of the Treaty on the Functioning of the European Union (TFEU).

A Court of Justice of the European Union (CJEU) ruling dated May 21, 2015 held that an EU member state may levy an “exit tax” on unrealized capital gains attributable to assets leaving its territory for another EU member country.

The case, Verder LabTec GmbH & Co KG v. Finanzamt Hilden, Third Chamber of the CJEU (2015) dealt with a German limited partnership that transferred intellectual property (IP) to a permanent establishment located in the Netherlands in 2005.

The case appears to be a departure from the CJEU’s stance of promoting EU as a common market.

For clients with IP located in the EU or other countries for that matter, it is important to review the local country tax considerations related to a transfer of valuable assets outside of such local country. Moreover, as multinational companies seek tax efficient domiciles for their IP, care must be taken in implementing such a strategy as to the potential tax consequences if the IP must be transferred out of the IP holding company’s home country.

Final Regulations Issued – Inversions-What Constitutes Substantial Activities for an Expanded Affiliated Group

Due to the 2014 news stories concerning large publicly traded companies merging with foreign entities, inversions became the focus of IRS and Congressional scrutiny. An “inversion” occurs when a U.S. corporation becomes a wholly owned subsidiary of a foreign corporation and is, therefore, headquartered outside the U.S.

The inversion rules under section 7874 of the Internal Revenue Code of 1986, as amended, provide a tax on the inversion gain for expatriated entities. An inversion is determined based on three different tests:

  • “Substantially All” Test: New foreign parent acquires substantially all properties held by a domestic corporation or partnership.
  • Ownership Test: After the acquisition, 60 percent or more of the foreign parent stock (by vote or value) is held by former owners of the domestic entity.
  • Substantial Business Activities Test: After the acquisition, the “expanded affiliate group” which includes the foreign parent does not have substantial business activities in the foreign parent’s home country.

On June 3, 2015, the IRS and U.S. Treasury released final regulations specifying when an expanded affiliated group (EAG) is considered to have “substantial business activities” in a foreign country. The regulations provide that if an EAG has at least 25% of the group’s employees, compensation, and assets located in foreign parent home country, the inversion rules do not apply.

For clients expanding operations outside the U.S., careful consideration needs to be paid on identifying a proper holding company domicile and insuring that high value assets transferred to a foreign entity directly or through a merger can meet the safe harbor rules for avoiding an inversion transaction.

To learn more about CohnReznick’s Tax Practice, please visit our webpage.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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