Sec. 7874: new Regs. tighten the anti-inversion rules.

• Author: Anderson, Kevin D.

On June 9, 2009, Treasury issued final and temporary regulations (T.D. 9453) under Sec. 7874 that clarify and expand a number of rules concerning inversions of domestic corporations. These regulations went into effect on June 12, 2009, and replace the prior temporary and proposed regulations issued on June 6, 2006 (T.D. 9265). The 2009 regulations are set to expire on June 8, 2012.

Sec. 7874: General Principles

Sec. 7874 applies to a transaction completed after March 4, 2003, if under a plan or series of related transactions:

*. A foreign corporation acquires (directly or indirectly) substantially all the properties of a domestic corporation (or partnership) (the acquisition test);

*. The shareholders (or partners) of the domestic corporation (or partnership) acquire at least 60% of the vote or value of the foreign corporation by reason of holding stock in the domestic corporation (or interest in the partnership) (the ownership test); and

*. The foreign corporation, considered together with all companies connected to it by a chain of greater than 50% ownership (i.e., the expanded affiliated group, or EAG), does not conduct substantial business activities in its country of incorporation compared with the total worldwide business activities of the EAG (the substantial activities test).

If an inversion transaction meets all the above tests, the foreign acquiring corporation is treated as a surrogate foreign corporation with respect to the expatriated domestic corporation or partnership. The tax treatment of the surrogate foreign corporation varies, depending on the level of shareholder continuity. If the shareholders of the inverted U.S. corporation own, by vote or value, 80% or more of the surrogate foreign corporation following the inversion, the foreign corporation is treated as a domestic corporation for all purposes of the Code and for all U.S. treaty purposes. If the ownership by former shareholders of the inverted corporation is less than 80% but is at least 60%, the surrogate foreign corporation is treated as a foreign corporation. However, the expatriated entity is denied the use of its tax attributes (e.g., net operating losses or foreign tax credits) to offset the inversion gain and certain other income for the succeeding 10-year period.

Changes Included in the 2009 Regs.

The 2009 regulations add to, modify, and clarify the guidance contained in the former 2006 regulations in a number of ways. In general, the 2009 regulations expand the scope of the inversion rules and may...