The board of directors of US pharmaceutical firm AbbVie said early Thursday it no longer backs a $54 billion (40 billion euro) takeover of its Irish-based competitor Shire.
In a statement recommending shareholders vote against the deal, AbbVie said its decision was due to a new crackdown on US firms relocating abroad to save on taxes.
The change made the takeover less appealing financially, the company said in a statement.
It acknowledged the company may have to pay Shire $1.6 billion for breaking the deal.
"Although the strategic rationale of combining our two companies remains strong, the agreed upon valuation is no longer supported as a result of the changes to the tax rules and we did not believe it was in the best interests of our stockholders to proceed," said AbbVie chairman and CEO Richard Gonzalez.
In July, Shire accepted the takeover bid, in a deal which was expected to cut AbbVie's effective tax rate to about 13 percent by 2016.
However, last month the US Treasury Department came up with new tax rules designed to halt a rising torrent of US companies relocating their tax residences offshore in order to save money on taxes.