On Thursday, the IRS issued temporary regulations governing whether a foreign corporation has “substantial business activities” in the foreign country in which, or under the law of which, the corporation is created or organized, compared to the total business activities of the expanded affiliated group (T.D. 9592). At the same time, it issued final regulations explaining when a foreign corporation is treated as a “surrogate foreign corporation” under Sec. 7874(a)(2)(B) (T.D. 9591). Sec. 7874 is intended to prevent abusive corporate inversion transactions.
Sec. 7874(a) imposes a tax on the inversion gain of an “expatriated entity.” Inversion gain generally is income or gain recognized from the transfer by the expatriated entity of stock or other property in an acquisition described in Sec. 7874(a)(2)(B)(i).
An expatriated entity is a domestic corporation or partnership with respect to which a foreign corporation is a “surrogate foreign corporation” and any U.S. person who is related to such a domestic corporation or partnership (Sec. 7874(a)(2)(A)). A surrogate foreign corporation is a foreign corporation
if, pursuant to a plan (or a series of related transactions), the entity completes after March 4, 2003, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership, after the acquisition at least 60 percent of the stock (by vote or value) of the entity is held—in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership, and after the acquisition the expanded affiliated group which includes the entity does not have substantial business activities in the foreign country in which, or under the law of which, the entity is created or organized, when compared to the total business activities of such expanded affiliated group. [Sec. 7874(a)(2)(B)]
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