§395 — Title 6 Domestic Security | U.S. Code

§395 Prohibition on contracts with corporate expatriates

Title 6 › Chapter CHAPTER 1— - HOMELAND SECURITY ORGANIZATION › Subchapter SUBCHAPTER VIII— - COORDINATION WITH NON-FEDERAL ENTITIES; INSPECTOR GENERAL; UNITED STATES SECRET SERVICE; COAST GUARD; GENERAL PROVISIONS › Part Part D— - Acquisitions › § 395

Last updated Apr 6, 2026|Official source

Summary

The Secretary must not make a contract with a foreign company that is treated as an "inverted domestic corporation" or with any of its subsidiaries. A foreign company is treated that way if, under a plan, it (1) buys substantially all the property of a U.S. corporation or the business of a U.S. partnership (this can happen before, on, or after November 25, 2002), (2) ends up with at least 80 percent of its stock owned by the former owners of that U.S. company, and (3) the combined group does not have substantial business activity in the foreign country where the company is formed compared to the group’s total activities. Some rules apply. Stock owned by members of the combined group or stock sold in a related public offering does not count toward the 80 percent test. An acquisition is treated as part of a plan if it happens within a 4-year period that starts 2 years before the date the 80 percent ownership rule is met. Transfers meant mainly to avoid the rule are ignored. Related domestic partnerships are treated together. The Secretary must make rules to treat warrants, options, convertible debt, and similar interests as stock or not. "Expanded affiliated group," "foreign incorporated entity," and the words "person," "domestic," and "foreign" are defined by the tax code (with "expanded affiliated group" using "more than 50 percent" in place of "at least 80 percent"). The Secretary may waive the ban for a specific contract if needed for national security.

Title 6, §395

Domestic Security — Source: USLM XML via OLRC

(a)The Secretary may not enter into any contract with a foreign incorporated entity which is treated as an inverted domestic corporation under subsection (b), or any subsidiary of such an entity.

(b)For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—

(1)the entity completes before, on, or after November 25, 2002, 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;

(2)after the acquisition at least 80 percent of the stock (by vote or value) of the entity is held—

(A)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

(B)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

(3)the expanded affiliated group which after the acquisition 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.

(c)(1)In applying subsection (b) for purposes of subsection (a), the following rules shall apply:

(A)There shall not be taken into account in determining ownership for purposes of subsection (b)(2)—

(i)stock held by members of the expanded affiliated group which includes the foreign incorporated entity; or

(ii)stock of such entity which is sold in a public offering related to the acquisition described in subsection (b)(1).

(B)If a foreign incorporated entity acquires directly or indirectly substantially all of the properties of a domestic corporation or partnership during the 4-year period beginning on the date which is 2 years before the ownership requirements of subsection (b)(2) are met, such actions shall be treated as pursuant to a plan.

(C)The transfer of properties or liabilities (including by contribution or distribution) shall be disregarded if such transfers are part of a plan a principal purpose of which is to avoid the purposes of this section.

(D)For purposes of applying subsection (b) to the acquisition of a domestic partnership, except as provided in regulations, all domestic partnerships which are under common control (within the meaning of section 482 of title 26) shall be treated as I 11 So in original. partnership.

(E)The Secretary shall prescribe such regulations as may be necessary to—

(i)treat warrants, options, contracts to acquire stock, convertible debt instruments, and other similar interests as stock; and

(ii)treat stock as not stock.

(2)The term “expanded affiliated group” means an affiliated group as defined in section 1504(a) of title 26 (without regard to section 1504(b) of such title), except that section 1504 of such title shall be applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.

(3)The term “foreign incorporated entity” means any entity which is, or but for subsection (b) would be, treated as a foreign corporation for purposes of title 26.

(4)The terms “person”, “domestic”, and “foreign” have the meanings given such terms by paragraphs (1), (4), and (5) of section 7701(a) of title 26, respectively.

(d)The Secretary shall waive subsection (a) with respect to any specific contract if the Secretary determines that the waiver is required in the interest of national security.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2004—Subsec. (a). Pub. L. 108–334, § 523(1), inserted before period at end “, or any subsidiary of such an entity”. Subsec. (b)(1). Pub. L. 108–334, § 523(2), inserted “before, on, or” after “completes”. Subsec. (c)(1)(B). Pub. L. 108–334, § 523(3), struck out “which is after November 25, 2002, and” after “beginning on the date”. Subsec. (d). Pub. L. 108–334, § 523(4), substituted “national” for “homeland”. 2003—Subsec. (d). Pub. L. 108–7 struck out “, or to prevent the loss of any jobs in the United States or prevent the Government from incurring any additional costs that otherwise would not occur” before period at end.