Last week the US Department of the Treasury and the Internal Revenue Service (IRS) announced additional steps designed to reduce the tax benefits of corporate inversions, whereby US companies redomicile abroad to take advantage of lower tax rates.

The proposals were designed to limit the ability of US companies to combine with foreign entities using a new foreign parent located in a ‘third country’, as well as limiting the ability of US companies to inflate the new foreign parent corporation’s size and therefore avoid the 80% ownership rule.

The new approach also requires the new foreign parent to be a tax resident of the country where the foreign parent is created or organized.

Pfizer is believed to have structured the deal confirmed today to avoid new rules, as although the pharmaceutical giant will have its principal executive offices in Ireland, its global operating headquarters will remain in New York.

Under the terms of the proposed transaction, Allergan will be made the parent company of the combined group. Then, a wholly owned subsidiary of Allergan will be merged into Pfizer under the umbrella of parent company Allergan plc. At this point, Allergan plc will be renamed ‘Pfizer plc’.

Shares of the combined company will be listed on the New York Stock Exchange, but when the deal is completed, the combined company is expected to maintain Allergan’s Irish legal domicile.

The newly combined entitywill be the largest pharmaceutical company worldwide, and is set to benefit from Ireland’s 12.5% rate of corporation tax, compared with compared with the 35% rate in the US.

Ian Read, Pfizer’s chief executive, said: ‘Through this combination, Pfizer will have greater financial flexibility that will facilitate our continued discovery and development of new innovative medicines for patients, direct return of capital to shareholders, and continued investment in the US, while also enabling our pursuit of business development opportunities on a more competitive footing within our industry.’

Speaking earlier about the planned clampdown on corporate tax inversions, Jacob Lew, US Treasury secretary, said: ‘While we intend to take additional action in the coming months, there is only so much the Treasury department can do to prevent these tax-avoidance transactions.

‘Only legislation can decisively stop inversions. The administration has been working with congress in an effort to reform our business tax system and address the issue of corporate inversions‎.’

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