EU: Mergers to reduce taxes: Americans moving to Europe

The latest trend in the world of multinationals: American companies merge with European companies and set up headquarters in Europe. Not in fact to gain access to new markets, nor out of sheer expansion policy. Granted, these factors also play a role, but an important additional motivation is the tax benefits that accompany the mergers.

The tax rate in European countries is often lower than in the United States. Corporate taxes in Ireland, for instance, is 12.5 percent. In the United States companies pay a hefty 35 percent. To reduce the tax paid annually to the treasury, American companies are increasingly looking for a loophole. Alluring economies include Ireland, Germany and Britain.

Tax inversion
The most obvious one is a relocation of the head office, but that option is pretty much boarded up with high costs by the Internal Revenue Service. There are, in principle, two ways to benefit from low taxation abroad. The first is a merger with a foreign company, where the new headquarters is located outside the United States. A second possibility is to establish an altogether new venture, absorbing two existing companies. Of course, the new company is established in a tax haven. This construction is called tax inversion or reversal structure.

Overseas capital

On the profits earned abroad, a levy must be paid if the money enters the United States. As long as the money remains outside US borders, no tax is paid. For companies it’s actually cheaper to borrow money, especially with the current low interest rates, than for profits from abroad to enter the US. Overseas billions are used to finance the mergers.

But shareholders also have an added interest. If the business is located in a tax haven, dividend can be issued over foreign profits without having to pay to the IRS.

Corporate exodus?

In recent times, American companies have made full use of these oversights. It started in the pharmaceutical industry, but now the 'exodus' is visible in other sectors as well. The fusion of banana giants Chiquita and Fyffes, conveniently headquartered in Dublin, is a recent example of a merger that fits this new trend. Another example related to the Fresh Produce sector is Monsanto investigating the acquisition of smaller Syngenta. The American seed giant has a value of $ 64 billion. Swiss Syngenta represents a value of 34 billion. The first calls for the merger came to nothing. If it had been a success, however, headquarters would almost certainly have been set up in Switzerland. Many more examples could be listed here.

The American government is thus losing out on a lot of money. It is expected that it will close down the loophole soon. As a result, the number of 'fleeing' businesses have grown rapidly in recent months.


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