26 USC 7874 - Rules relating to expatriated entities and their foreign parents

U.S Code last checked for updates: Nov 22, 2024

§ 7874.

Rules relating to expatriated entities and their foreign parents

(a)

Tax on inversion gain of expatriated entities

(1)

In general

(2)

Expatriated entity

For purposes of this subsection—

(A)

In general

The term “expatriated entity” means—

(i)

the domestic corporation or partnership referred to in subparagraph (B)(i) with respect to which a foreign corporation is a surrogate foreign corporation, and

(ii)

any United States person who is related (within the meaning of section 267(b) or 707(b)(1)) to a domestic corporation or partnership described in clause (i).

(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)

(b)

Inverted corporations treated as domestic corporations

(c)

Definitions and special rules

(1)

Expanded affiliated group

(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

(4)

Certain transfers disregarded

(5)

Special rule for related partnerships

(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

The term “applicable period” means the period—

(A)

beginning on the first date properties are acquired as part of the acquisition described in subsection (a)(2)(B)(i), and

(B)

ending on the date which is 10 years after the last date properties are acquired as part of such acquisition.

(2)

Inversion gain

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.

(3)

Foreign related person

The term “foreign related person” means, with respect to any expatriated entity, a foreign person which—

(A)

is related (within the meaning of section 267(b) or 707(b)(1)) to such entity, or

(B)

is under the same common control (within the meaning of section 482) as such entity.

(e)

Special rules

(1)

Credits not allowed against tax on inversion gain

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)

the amount of the inversion gain for the taxable year, and

(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.

(2)

Special rules for partnerships

In the case of an expatriated entity which is a partnership—

(A)

subsection (a)(1) shall apply at the partner rather than the partnership level,

(B)

the inversion gain of any partner for any taxable year shall be equal to the sum of—

(i)

the partner’s distributive share of inversion gain of the partnership for such taxable year, plus

(ii)

gain recognized for the taxable year by the partner by reason of the transfer during the applicable period of any partnership interest of the partner in such partnership to the surrogate foreign corporation, and

(C)

the highest rate of tax specified in the rate schedule applicable to the partner under this chapter shall be substituted for the rate of tax referred to in paragraph (1).

(3)

Coordination with section 172 and minimum tax

(4)

Statute of limitations

(A)

In general

(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

(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.

(Added Pub. L. 108–357, title VIII, § 801(a), Oct. 22, 2004, 118 Stat. 1562; amended Pub. L. 109–135, title IV, § 403(u), Dec. 21, 2005, 119 Stat. 2628; Pub. L. 115–97, title I, § 13001(b)(1)(C), Dec. 22, 2017, 131 Stat. 2096.)

cite as: 26 USC 7874