IRS Announces Additional Revisions To Anti-Inversion Regulations Under Code Section 7874
On September 17, 2009, the Internal Revenue Service
("IRS") issued Notice 2009-78 ("Notice")
announcing its intention to issue additional regulations under the
"anti-inversion" rules of Section 7874 of the Internal
Revenue Code of 1986, as amended ("Code"). The most
recent previous guidance by the IRS under Code Section 7874 was
final and temporary regulations issued in June, 2009.1
The additional new regulations will incorporate the rules described
in the Notice that will identify certain stock of a foreign
corporation that is disregarded for determining ownership of the
foreign corporation in applying the anti-inversion rules.
Background
Generally, Code Section 7874 targets certain inversion
transactions that seek to avoid U.S. tax by merely shifting the
place of organization of a domestic corporation (or partnership) to
an offshore jurisdiction. Under current law, a foreign corporation
is generally treated as a "surrogate foreign corporation"
for this purpose if, pursuant to a plan (or a series of related
transactions), the following three conditions are satisfied:
(1) the foreign corporation directly or indirectly acquires
substantially all of the properties of a domestic corporation;
(2) after the acquisition, at least 60% of the stock (by vote or
value) of the foreign corporation is held by former shareholders of
the domestic corporation by reason of holding stock in the domestic
corporation; and
(3) after the acquisition, the expanded affiliated group
("EAG") (as defined in Code Section 7874(c)(1)) that
includes the foreign corporation does not have substantial business
activities in the foreign country in which, or under the laws of
which, the foreign corporation is created or organized, when
compared to the total business activities of the EAG.
Similar provisions apply to transactions involving the
acquisition by a foreign corporation of substantially all of the
properties constituting a trade or business of a domestic
partnership.
The U.S. tax consequences of surrogate foreign corporation
status depend upon the degree of ownership of the surrogate foreign
corporation by former shareholders of the domestic corporation. If
the former shareholders own at least 60% but less than 80%, the
inversion transaction is respected, but certain additional U.S. tax
burdens are imposed on the acquired domestic corporation and its
affiliates with respect to the inversion transaction itself,
certain related restructuring steps and transactions...
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