By Soyoung Kim and Olivia Oran
NEW YORK (Reuters) - A series of European law firms are aggressively pitching low corporate taxes in their countries to prospective U.S. clients, seeking to tap into the tax inversion frenzy that has seized Corporate America in recent months.
At least eight European law firms are pitching their services to major U.S. law firms and Wall Street banks, hoping that U.S. companies considering an inversion choose Ireland, Britain or the Netherlands for their new tax domicile, according to people with knowledge of the matter.
In an inversion deal, a company moves its tax domicile to a country with a lower effective corporate tax rate through a takeover of an often smaller company in that jurisdiction.
The move has recently been particularly appealing to American companies given the U.S. federal corporate tax rate of 35 percent is well above those prevailing in countries such as Britain, where the rate is set to drop to 20 percent next year. Ireland and Britain have also become popular destinations because they allow companies to shift profits into a tax haven and then back to shareholders as dividends without paying any tax - a move that is not possible under the U.S. tax code.
The European law firms are talking up the relative merits of the corporate laws and tax codes in their home countries over rival jurisdictions, the sources said.
The law firms include at least three from Ireland: Arthur Cox, A&L Goodbody, and Matheson; three from the Netherlands - De Brauw Blackstone Westbroek, Stibbe, and NautaDutilh; plus the UK-based Slaughter and May, and Macfarlanes, according to the sources.
Although it is not clear how large the fees are for the inversion services offered by these firms, at least some of them appear to be having a bumper year, thanks to a surge in such deals.
Their pitches on inversions appear to have increased in recent months, the sources said, with more blue chip U.S. companies such as Pfizer Inc and Walgreen Co actively exploring deals for tax benefits.
The marketing comes even as the chorus of voices calling for an end to such financial engineering aimed largely at reducing tax grows louder in Washington.
U.S. President Barack Obama will call later on Thursday for action to prevent inversions, in particular throwing his weight behind proposed legislation that would deem any company with half of its business in the United States to be U.S. domiciled, White House officials said.
Unlike global law firms that have a major presence both in the United States and across Europe, more regionally-focused European firms have a smaller U.S. client base, and are therefore very keen to build relationships with U.S. firms to expand their businesses.
Most of the big New York firms also do not have offices in Ireland. American firms prefer to partner with local firms on inversion deals not only for their specific legal and tax expertise in a particular country, but also because they're not directly competing with them, the people with knowledge of the matter said.
A number of the European firms stressed that they have offices in the U.S. and regularly visit U.S. law firms to discuss various transactions, not just inversions.
"Interest in US-UK M&A has been running high for a number of months ... The UK is increasingly regarded as an attractive environment for business and not only for tax reasons," said Andy Ryde, head of Slaughter and May’s corporate practice based in London.
Chris Warner, head of NautaDutilh's tax practice in Amsterdam, said:“There is perhaps a little more activity in this area [inversions] now and more reasons to talk to each other about what’s going on in the marketplace.”
Conor Hurley, partner and head of tax at Arthur Cox said: "M&A is one of a number of important areas for us and inversion work is part of that but we are a full service law firm."
A spokesperson for Stibbe said that the Dutch firm has had a New York office for almost 30 years to serve its clients and is not focusing on inversion services in particular.
Matheson and A&L Goodbody declined to comment, while the other firms did not respond to requests for comment.
TOPIC DU JOUR
By moving their tax domiciles to lower rate jurisdictions, American companies may be able to avoid the top U.S. corporate rate on more of their global profits. Currently many companies are holding foreign profits tax-free overseas as bringing them home means they could face a big U.S. tax liability.
"Inversions are the topic du jour at the moment," said Patrick Cox, a tax partner at Withers LLP in New York. "So you will have law firms in jurisdictions with low tax rates coming out to say, 'You should come here, we have a sophisticated legal system, banking regime and low tax rate.’"
A&L Goodbody saw deal volumes triple from last year, thanks largely to its role in advising Minneapolis-based medical device company Medtronic Inc on the $42.9 billion takeover of Irish-domiciled Covidien Plc.
Arthur Cox, which worked on the $1.1 billion merger of U.S. banana company Chiquita Brands International and Irish rival Fyffes Plc, has advised on $78 billion worth of transactions so far this year, compared with $23 billion in the same period last year.
Those deals have helped vault the firm to the 29th spot in the ranking of global M&A legal advisers, up from the 50th position in the year-ago period, according to Thomson Reuters data as of July 22.
"Potentially what's happening here is that there's a new toy out there and everyone wants a piece of it," said Adam Rosenzweig, a law professor at Washington University School of Law in St. Louis.
Since 2010, about two dozen U.S. companies have shifted their legal tax residences to lower-tax countries via corporate
deals, versus about the same number over the previous 25 years, a Reuters review of transactions showed.
Half of the defecting companies chose Ireland for their new corporate domicile, whereas the U.K and the Netherlands each attracted four and three transactions, respectively.
So far this year, nine inversion transactions have been announced, compared with four such deals in all of 2013.
Ireland, which has a corporate tax rate of just 12.5 percent, saw deal volumes rise nearly six-fold in the first half of the year, accounting for almost 20 percent of all European transactions, Thomson Reuters data shows.
Other countries have been making their tax laws friendlier to companies. Britain, once known for its tax-unfriendly regime that saw UK companies fleeing abroad, has reversed course in recent years by lowering its corporate tax rate from 28 percent to the current 21 percent rate. U.K. companies now also don't have to pay income tax on profits earned by overseas subsidiaries.
The Netherlands, meanwhile, is attractive to companies not only for its corporate tax rate of 25 percent, but also for its flexible rules on corporate governance and board structure, lawyers say.
Such rules attracted advertising giants Publicis Groupe SA of France and Omnicom Inc from the U.S. to attempt a now failed $35 billion merger that would have seen the combined company incorporate in the Netherlands, while having tax residency in the Britain.
Switzerland, which was once regarded as a tax haven for corporations, has lost favor in recent years because of tighter banking regulations and new rules stipulating that shareholders should be allowed to vote on executives' compensation. "That’s given these other countries an opening," said Alan Klein, a partner at law firm Simpson Thacher & Bartlett LLP.
(Reporting by Soyoung Kim and Olivia Oran in New York, additional reporting by Kevin Drawbaugh in Washington and Tom Bergin in London; Editing by Martin Howell)
- Mergers, Acquisitions & Takeovers