The definition narrowed down distribution
Skinny down distribution is the practice of cropping of the assets and profits of large domestic corporations in order to make it suitable to acquire or merge with a smaller foreign legal entity. It is a widely used practice in corporate inversions.
Breaking down the narrowed down list’
What is the motive for skinny down distribution? This applies to US corporate tax laws. To avoid U.S. taxes, us multinationals sometimes change themselves by buying smaller foreign subsidiaries and makes it the parent company, at least on paper (and therefore subject only to the taxes of their new national home). However, according to current Treasury Department of the United States. Rules, if the former shareholders of US companies have at least 80% of the total firms, new foreign parent is treated as a U.S. Corporation (despite its new corporate address) – and it is paid in taxes to the IRS. This can be a problem when the foreign partner is smaller in size than its American counterpart: it must be more than 20%, in fact, for the corporate inversion to accomplish their tax avoidance objectives.
In such cases, American companies are trying to reduce, or “skinny down” their financial footprint through a number of measures. For example, they may pay special dividends to shareholders. Or they artificially inflate the Size of its fusion partner, transferring the assets of the company. The reverse could also happen that a foreign partner can let go of some of its assets by establishing a new subsidiary.
Another tactic is that of Stripping earnings. This happens when the child once again, the U.S. inverted company takes debt and avoid paying taxes on domestic profits, sending them abroad to the foreign parent in the form of tax deductibility of interest payments.
Stop skinny down
In 2011-2015, the wave of inversion deals sent to the Ministry of Finance, trying to quell skinny-down distributions and other similar practices. The notice taken by the Department in 2014, and issued as law in 2016, has introduced such a test: any “non-ordinary distribution” was 36 months to the date of acquisition will be treated as part of a plan to “skinny down” of the Corporation and, therefore, are invalid. The notice includes various operations, including the repurchase of shares, as measures that could be implemented to reduce balance figures. In 2016, the laws went further, and attacked the earnings Stripping: reclassified some forms of debt into equity, thereby changing not taxable payments of taxable dividends and earnings Stripping strategies more difficult to pursue.
It’s possible that the skinny-down distributions will be reduced in numbers as a result of lower taxes and jobs act of 2017, which reduces the corporate tax rate to 15% – a rate much more in line with other countries – thus eliminating the financial incentive for corporate inversions.