Inversion Regulations: The Illusory "Safe Harbor"

Inversion Regulations: The Illusory "Safe Harbor"

[On June 7, 2012], Treasury issued temporary and proposed (T.D. 9592) and final (T.D. 9591) regulations under IRC Section 7874 to "provide more certainty in applying IRC §  7874" and to "improve the administrability" of the substantial business activities exception (see Preamble to T.D. 9592.) As such, the temporary regulations are supposed to help taxpayers and their tax advisors in determining, with certainty, whether the transactions in question are subject to the anti-inversion rules. If that, indeed, were the goal, then the regulations accomplished their goal, but at what cost?

How the Anti-Inversion Rule Works

80 Percent or More Ownership Test. IRC Section 7874 carries out the Congressional attack on inversions in a rather inventive way. For certain ensuing foreign corporations, the statute treats those corporations as U.S. domestic corporations for all purposes of the Internal Revenue Code (Code), even though those corporations are foreign for all other purposes. So, if Alpha Corporation, a domestic public corporation, reorganizes into a Brazilian corporation, Alpha-II (the Brazilian corporation) is still a domestic corporation under U.S. tax law, but is a Brazilian corporation under all other laws, including Brazil's. From a U.S. standpoint, nothing has happened: No exchange, no transfer; no tax. Hence, it was a "non-event" transfer.

A non-event transfer occurs when the domestic corporation's shareholders hold, immediately after the reorganization, 80 percent or more of the ensuing foreign corporation's stock.

Between 60 and 80 Percent Ownership Tests. When at least 60 but less than 80 percent of the stock of the new foreign corporation is owned by the former shareholders of the domestic corporation following the reorganization, the foreign corporation is referred to as a "surrogate foreign corporation". That designation has its own tax ramifications, but being treated as a domestic corporation is not one of them.

Expanded Affiliated Group. Congress, on the general theory that most of the inversions that taxpayers contemplate will involve multinationals, concluded to treat the new foreign (that is, the corporation into which the domestic corporation merged) acquiring corporation and its related corporations that comprise the business enterprise as a single entity labeled "expanded affiliated group" (or "EAG," as the regulations ( Treas. Reg. 1.7874-1(a) dub the entity). An EAG is any group of corporations that consists of corporations interrelated by stock ownership comprising more than 50 percent of the members' outstanding stock in vote and value. Thus, if a U.S. parent of a multinational group reorganizes itself into an Irish corporation, the members of the multinational (subsidiaries, etc.), including the Irish parent, will comprise an EAG.

Substantial Business Activities Exception

As relevant here, both the non-event and the surrogate reorganization results described above do not occur when the resulting foreign corporation meets the "substantial business activities" test.


The 2012 regulations require the taxpayer to analyze its approach to possible use of the safe harbor...


The 2012 temporary regulations have, for all practical purposes, made the "substantial business activities" exception illusory. We seriously doubt whether any of the corporations that have inverted in the last decade would have met the 25 percent standard set forth in the 2012 regulations...


Information referenced herein is provided for educational purposes only. For legal advice applicable to the facts of your particular situation, you should obtain the services of a qualified attorney licensed to practice law in your state.


LEXIS users can access the complete commentary HERE. Additional fees may apply. (Approx. 6 pages)

RELATED LINKS: For more background on anti-inversion rules, see:

For more discussion on corporate conversions, see:


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