PRIA, Government Policy, Made Personal

Summary

Makes certain U.S. companies pay U.S. tax when a foreign company effectively takes them over and the deal is meant to move the parent abroad. If a U.S. company or related U.S. persons become an "expatriated entity" under a plan where a foreign firm buys nearly all the U.S. business after March 4, 2003, then that expatriated entity’s taxable income for any year that falls during the "applicable period" cannot be less than its "inversion gain." An expatriated entity is the U.S. corporation or partnership bought and U.S. persons related to it. A "surrogate foreign corporation" is a foreign firm that, after the deal, (1) bought substantially all the U.S. assets, (2) is at least 60% owned by the former U.S. owners, and (3) has little business activity in the foreign country compared with the whole group. If the foreign firm would meet those rules using 80% instead of 60%, it is treated as a U.S. company for tax purposes. "Applicable period" runs from the first date assets are bought through 10 years after the last such purchase. "Inversion gain" is income or gain from transfers or licenses of stock or assets during that period, and it includes transfers to related foreign persons. Most tax credits can’t fully reduce the tax on inversion gain; only the credit under section 901 is treated normally, and others apply only after comparing inversion gain times the top tax rate in section 11(b). If the expatriated entity is a partnership, the rules apply to each partner; each partner’s inversion gain is the partner’s share plus any gain from transferring the partner’s interest to the foreign buyer. Certain ownership and transfers are ignored for tests (for example, stock held by group members or stock sold in a related public offering). Actions within a 4‑year window that start up to 2 years before ownership rules are met are treated as part of the plan. The law extends the IRS assessment period: for pre-inversion years the IRS has at least 3 years after the taxpayer tells the IRS about the acquisition to assess deficiencies. Treaties do not allow avoiding these rules. The Treasury must write rules to carry out the law and to stop people from avoiding it by using related parties, intermediaries, or tricks to change group membership.

Title 26, §7874

Internal Revenue Code, Source: USLM XML via OLRC

(a)Tax on inversion gain of expatriated entities

(1)In general

The taxable income of an expatriated entity for any taxable year which includes any portion of the applicable period shall in no event be less than the inversion gain of the entity for the taxable year.

(2)Expatriated entity

For purposes of this subsection

(A) In general

(B)Surrogate foreign corporation

A foreign corporation shall be treated as a surrogate foreign corporation if, pursuant to a plan (or a series of related transactions)—

(i)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,

(ii)after the acquisition at least 60 percent of the stock (by vote or value) of the entity is held—

(I)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

(II)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

(iii)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.

An entity otherwise described in clause (i) with respect to any domestic corporation or partnership trade or business shall be treated as not so described if, on or before March 4, 2003, such entity acquired directly or indirectly more than half of the properties held directly or indirectly by such corporation or more than half of the properties constituting such partnership trade or business, as the case may be.

(3)Coordination with subsection (b)

A corporation which is treated as a domestic corporation under subsection (b) shall not be treated as a surrogate foreign corporation for purposes of paragraph (2)(A).

(b)Inverted corporations treated as domestic corporations

Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting “80 percent” for “60 percent”.

(c)Definitions and special rules

(1)Expanded affiliated group

The term “expanded affiliated group” means an affiliated group as defined in section 1504(a) but without regard to section 1504(b)(3), except that section 1504(a) shall be applied by substituting “more than 50 percent” for “at least 80 percent” each place it appears.

(2)Certain stock disregarded

There shall not be taken into account in determining ownership under subsection (a)(2)(B)(ii)—

(A)stock held by members of the expanded affiliated group which includes the foreign corporation, or

(B)stock of such foreign corporation which is sold in a public offering related to the acquisition described in subsection (a)(2)(B)(i).

(3)Plan deemed in certain cases

If a foreign corporation 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 (a)(2)(B)(ii) are met, such actions shall be treated as pursuant to a plan.

(4)Certain transfers disregarded

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.

(5)Special rule for related partnerships

For purposes of applying subsection (a)(2)(B)(ii) to the acquisition of a trade or business of a domestic partnership, except as provided in regulations, all partnerships which are under common control (within the meaning of section 482) shall be treated as 1 partnership.

(6)Regulations

The Secretary shall prescribe such regulations as may be appropriate to determine whether a corporation is a surrogate foreign corporation, including regulations—

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

(B)to treat stock as not stock.

(d)Other definitions

For purposes of this section

(1) Applicable period

(2)Inversion gain (3) Foreign related person

The term “inversion gain” means the income or gain recognized by reason of the transfer during the applicable period of stock or other properties by an expatriated entity, and any income received or accrued during the applicable period by reason of a license of any property by an expatriated entity—

(A)as part of the acquisition described in subsection (a)(2)(B)(i), or

(B)after such acquisition if the transfer or license is to a foreign related person.

Subparagraph (B) shall not apply to property described in section 1221(a)(1) in the hands of the expatriated entity.

(e)Special rules

(1)Credits not allowed against tax on inversion gain (2) Special rules for partnerships

Credits (other than the credit allowed by section 901) shall be allowed against the tax imposed by this chapter on an expatriated entity for any taxable year described in subsection (a) only to the extent such tax exceeds the product of— (A)

(B)the highest rate of tax specified in section 11(b).

For purposes of determining the credit allowed by section 901, inversion gain shall be treated as from sources within the United States.

(3)Coordination with section 172 and minimum tax

Rules similar to the rules of paragraphs (3) and (4) of section 860E(a) shall apply for purposes of subsection (a).

(4)Statute of limitations

(A)In general

The statutory period for the assessment of any deficiency attributable to the inversion gain of any taxpayer for any pre-inversion year shall not expire before the expiration of 3 years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe) of the acquisition described in subsection (a)(2)(B)(i) to which such gain relates and such deficiency may be assessed before the expiration of such 3-year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.

(B)Pre-inversion year

For purposes of subparagraph (A), the term “pre-inversion year” means any taxable year if—

(i)any portion of the applicable period is included in such taxable year, and

(ii)such year ends before the taxable year in which the acquisition described in subsection (a)(2)(B)(i) is completed.

(f)Special rule for treaties

Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section.

(g)Regulations

The Secretary shall provide such regulations as are necessary to carry out this section, including regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including the avoidance of such purposes through—

(1)the use of related persons, pass-through or other noncorporate entities, or other intermediaries, or

(2)transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons.

Notes & Related Subsidiaries

Editorial Notes

Amendments

2017—Subsec. (e)(1)(B). Pub. L. 115–97 substituted “section 11(b)” for “section 11(b)(1)”. 2005—Subsec. (a)(3). Pub. L. 109–135 reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “Paragraph (1) shall not apply to any entity which is treated as a domestic corporation under subsection (b).”

Statutory Notes and Related Subsidiaries

Effective Date

of 2017 AmendmentAmendment by Pub. L. 115–97 applicable to taxable years beginning after Dec. 31, 2017, see section 13001(c)(1) of Pub. L. 115–97, set out as a note under section 11 of this title.

Effective Date

of 2005 AmendmentAmendment by Pub. L. 109–135 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 403(nn) of Pub. L. 109–135, set out as a note under section 26 of this title.

Effective Date

Pub. L. 108–357, title VIII, § 801(c), Oct. 22, 2004, 118 Stat. 1566, provided that: “The

Amendments

made by this section [enacting this section] shall apply to taxable years ending after March 4, 2003.”

§7874 Rules Relating to Expatriated Entities and Their Foreign Parents

Summary

Title 26, §7874

Notes & Related Subsidiaries

Editorial Notes

Amendments

Statutory Notes and Related Subsidiaries

Effective Date

Effective Date

Effective Date

Amendments

Citations & Metadata