What is “Inversion” and how does it impact shareholders?
Written by: Martin X. Shields
A term you hear recently in the news is the “inversion” of U.S. companies as they merge with a foreign company in order to reduce their U.S. federal tax bill. There are a number of firms who have recently taken this action including AbbVie (ABBV) a U.S. pharmaceutical firm that plans to merge with Irish drug firm Shire this year. Once the deal is consummated, the combined company will be taxed as a U.K. corporation with an estimated tax rate of about 13% by 2016.
As a stock shareholder it is important to know that these mergers could have you incur a capital gains tax liability. Although the U.S. company will ultimately control the foreign company, the U.S. company is technically being acquired. The shareholders will receive new shares to replace their old ones and the exchange is considered taxable by the Internal Revenue Service.
To illustrate the situation, if an investor purchased shares in a company at $20, and the firm “sells” itself in an inversion merger at $50 a share, the investor will typically receive shares in the new firm and owe tax on the $30 per-share. This gain is the difference between the original cost and the price at the time of the merger.
Currently, the rate on long-term capital gains ranges from zero to nearly 24%, depending on an individual’s taxable income.
The irony about these deals is that they are structured to lower the tax rate of the company for the benefit of investors but as explained above, they frequently cause a tax liability for investors. Not surprisingly, executives of these companies have included language in many of these deals that the company will pay for any tax liability that is incurred by executives because of the inversion.
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Bouchey Financial Group, Ltd. [“Bouchey Financial”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Bouchey Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Neither Bouchey Financial’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if Bouchey Financial is engaged, or continues to be engaged, to provide investment advisory services. Bouchey Financial is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Bouchey Financial’s current written disclosure Brochure and Form CRS discussing our advisory services and fees is available for review upon request or at www.bouchey.com. Please Note: Bouchey Financial does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Bouchey Financial’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a Bouchey Financial client, please contact Bouchey Financial, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.