Corporate Inversions: How US Shareholders May Be Adversely Affected

Due to a rapid rise in the number of transactions and the resulting potential losses for the Department of Treasury, corporate inversions are a current hot topic in Washington. The US corporations which enter into these transactions defend their actions, at least in part, by highlighting their fiduciary duty to shareholders to maximize profits, which can be achieved through incorporating in a lower tax jurisdiction. However some US shareholders may be subject to a taxable capital gain due to such transactions which, in some cases, they may not even be aware are taking place.

A corporate inversion occurs when a US multinational corporation combines with a foreign corporation which then becomes the 'parent corporation' of the US corporation. For US corporate tax purposes, the result is that the multinational company is no longer subject to US taxation on its worldwide income. Instead, the corporation is only subject to US tax on its US earnings. Since the US has one of