Local Law Firms Home > Taxation Law News > U.S. Plugs Loophole in Corporate Taxation Law U.S. based corporations looking to skirt taxation law by nominally moving their registered headquarters overseas will find it a lot harder now under new treasury rules. The merger loophole that many companies were exploiting allowed a large company to acquire or merge with a dummy or shell corporation overseas in a tax haven or low tax regime and move the headquarters of the new joint entity to the overseas location. All it needed was that the new headquarters should show "substantial business activity." This standard was easily subject to different interpretations and many companies got away by just showing some nominal activity while keeping their former US headquarters as the main base of operations. However, the U.S. Treasury has plugged this loophole by changing the requirements to specific targets. Any company that wants to move overseas through a merger has to show at least 25 percent of gross income, property and employees in the new headquarters abroad. Just one day before this rule went into effect, the Cleveland-based Eaton Corp. announced a $11.8 billion merger with rival electrical equipment manufacturer Cooper Industries PLC, which is incorporated in Ireland but operates out of Houston. The merged entity will be based in Ireland. Eaton Corp. estimates they will be saving about $160 million per year in taxes and about $260 million per year in other savings related to the merger and subsequent move to become an Irish company. The move shields the company's overseas profits from the IRS, because the US taxes all income earned anywhere in the world if the money is brought in. Eaton expects to save $535 million per year by 2016, which they would not have got had they announced the merger and move to Ireland one day later. Company officials say their operational headquarters will still be in Northeast Ohio even if the new merged entity called Eaton Global Corp. is incorporated in Ireland.
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