Canadian Lawyer InHouse

DECEmBEr 2014 28 INHOUSE be treated as a domestic entity and be subject to the appropriate taxes. "A U.S. company would acquire a foreign company and just make sure that the foreign shareholders get at least 20 per cent or more of the shares," says Jeffrey Rubinger, an international tax lawyer at Bilzin Sumberg Baena Price & Axelrod LLP in Miami. In 2009, the U.S. Treasury told companies they could only invert to coun- tries where they had "substantial business activities," eliminating previously popular destinations like Panama and Bermuda. And so companies started to invert to developed countries like Ireland, the Netherlands, the U.K., and Canada. While American lawmakers and com- mentators have been loudly denouncing in- versions, recipient countries like Canada have been reveling in the trend. Valeant, Canada's largest pharmaceutical company, arrived here via inversion in 2010. Even Tim Hortons repatriated to Canada via inversion in 2009 after being spun off by Wendy's. Prime Minister Stephen Harper, during a rare question-and-answer session in New York, was practically gloating about the new corporate immigrants. "Business activity moving to where tax rates and where eco- nomic environments are more competitive is just the law of economics," he told the crowd at Goldman Sachs. While relatively low corporate tax rates have certainly been a factor, Canada also has a tax treaty network that's often very gener- ous to companies operating abroad. "Most of the time you hear about using Switzerland or Ireland or the U.K. for these inversions, but Canada really offers the same benefi ts as those European countries in that they also exempt dividential corpo- rate income tax," says Rubinger. Another benefi t the Canadian tax system provides is the ability to get foreign tax cred- its for taxes that have been spared by foreign countries. "So they'll give you a credit on taxes that you never paid," says Rubinger. And some benefi ts have nothing to do with taxes. Canada is a more defendant-friendly jurisdiction with better liability protection than the United States. "You've got these big pharmaceutical companies with earnings based on patents, but if they've got a bad drug, that can bring down the whole ship," says Berg. Even the Canadian court system can be an incentive to move. Unlike the United States, most civil matters are heard before a judge not a jury. Berg points to the lengthy and complex patent litigation between Apple and Samsung, which was heard in front of a jury, as an example of why American companies might prefer to take their chance with a judge. "If we're going to be sued for patent infringement, I don't want 12 Texans trying to understand my 2,000 page patent application," he says. Paul Gilman, a partner with Aronberg Goldgehn Davis & Garmisa in Illinois, says inverting companies like to stay within the developed world even though some developing countries may offer more attractive tax rates. "Once you move, you're governed by the corporate law of that country," he says. "You have to be very careful that you're not going to a jurisdiction that has a not very well developed body of corporate law." But Canadians shouldn't get too comfort- able with the idea of American companies moving north en masse. A combination of political pressure and new Treasury rules has already put a number of deals on ice. In August, Walgreens kyboshed a poten- tial inversion to Switzerland after some politi- cians began to call for only U.S.-based phar- macies to have access to government-funded programs like Medicare and Medicaid. Then in September, the U.S. Treasury released new rules making inversions more diffi cult and less profi table. These primarily targeted the creative maneuvers companies have developed over the past few years to facilitate inversion deals. "Hopscotch" loans, where a foreign subsidiary of an inverting company lends money to a newly formed foreign parent, skipping over the U.S. company and avoid- ing taxes, will now be treated as dividends, and thus subject to U.S. taxation. "That will have some negative impacts for companies that are inverting because it's more diffi cult to use the offshore money," says Rubinger. The "skinny down" distribution, where a U.S. company would artifi cially lower its value by issuing an extraordinary dividend or selling off assets to comply with the 80 per cent threshold, has also been axed. While other widely used and controver- sial techniques like "earnings stripping" weren't affected by the new regulations, they're already having an impact. A number of companies that were plan- ning on inverting, including AbbVie, Salix Pharmaceuticals, and Chiquita Brands In- ternational, cancelled their deals. And according to Rubinger, some compa- nies will be wary of inverting for fear of anti-inversion legislation from Congress in the future. "I think overall inversions are going to slow down because people aren't sure what the U.S. Congress is going to do and if they do enact rules, if they're going to be retroactive," he says. So is this the end of the inversion? Not likely. "It's going to slow them down a bit but it's not going to stop them," says Gilman. While the new rules did kill some of the proposed inversions, the majority of the most of the time you hear about using Switzerland or Ireland or the U.K. for these inversions, but Canada really offers the same benefi ts as those European countries in that they also exempt dividential corporate income. JEFFrEY rUBINGEr, Bilzin Sumberg Baena Price & Axelrod LLP '' ''

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