Home » Tax Regs On Inversions Define Business Activity And Inversion Gain

Tax Regs On Inversions Define Business Activity And Inversion Gain

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Inversion regs make clear when an organization has substantial enterprise actions abroad and describe the calculation of inversion achieve. These ideas are pivotal in figuring out whether or not an inversion has occurred and, if that’s the case, the quantity of inversion achieve.

Reg. section 1.7874-3 defines substantial enterprise actions and reg. section 1.7874-11 gives the calculation of inversion achieve. Reg. section 1.7874-12 gives 20 definitions that apply to the inversion regs and regs beneath sections 367, 956, and 7701.

A tax inversion is a restructuring that replaces a U.S. mother or father firm with a international mother or father in order that the unique mother or father turns into a subsidiary, and the tax residence of the goal enterprise adjustments to a international nation whereas possession of the goal stays typically the identical.

The inversion guidelines in section 7874 and the related regs are supposed to discourage inversions by limiting the flexibility of U.S. companies to maneuver their operations abroad with out unfavorable U.S. tax penalties.

Earlier inversion articles addressed:

  • surrogate international company standing in reg. section 1.7874-2;
  • guidelines in reg. section 1.7874-1 that make clear the elimination of affiliate-owned inventory from the possession share calculation in section 7874(c)(2)(A);
  • steerage in reg. section 1.7874-4 on therapy of international buying company inventory transfers associated to U.S. entity acquisitions;
  • guidelines in reg. section 1.7874-7 that disregard inventory attributable to passive belongings and reg. section 1.7874-8 that disregard inventory attributable to a number of U.S. entity acquisitions;
  • guidelines in reg. section 1.7874-9 that disregard inventory attributable to third-country transactions and reg. section 1.7874-10 that disregard inventory distributions; and
  • guidelines in reg. section 1.7874-5 that describe the impact of international buying company inventory transfers after a U.S. entity acquisition, and in reg. section 1.7874-6 that comprise necessities for transferred inventory to be handled as held by a member of an expanded affiliated group (EAG).

This text covers reg. sections 1.7874-3, -11, and -12. Reg. section 1.7874-3 was added by T.D. 9720 on June 4, 2015, and amended by T.D. 9761 on April 8, 2016, and T.D. 9834 on July 12, 2018. Reg. sections 1.7874-11 and -12 have been each added by T.D. 9834 on July 12, 2018.

Section 7874Section 7874 gives guidelines on expatriated entities and their international dad and mom. The steerage was added to the code by the American Jobs Creation Act of 2004 and comprises:

  • a normal rule imposing a tax on inversion positive factors;
  • a rule treating inverted companies as U.S. companies;
  • an assortment of definitions and particular guidelines (subsections (c)-(e));
  • a rule that prohibits an exemption from section 7874 beneath a U.S. treaty obligation; and
  • a grant of authority to subject regs, together with antiavoidance regs.

The final rule in paragraphs (a)(1)-(3) imposes a tax on inversion achieve when entities expatriate. Paragraph (a)(1) gives that the taxable revenue of an expatriated entity for a tax 12 months that features a portion of an relevant interval might by no means be lower than the entity’s inversion achieve for the 12 months.

Paragraph (a)(2) typically defines an expatriated entity as a U.S. entity that transfers property to a surrogate international company, which is a international company that meets an acquisition check, an possession check, and a considerable enterprise actions check. Subparagraph (a)(2)(A) defines an expatriated entity as:

  • a U.S. company or partnership described in clause (a)(2)(B)(i) that transfers property to a surrogate international company; or
  • a U.S. individual associated (inside the that means of section 267(b) or 707(b)(1)) to a U.S. company or partnership that transfers property to a surrogate international company.

Subparagraph (a)(2)(B) gives {that a} international company is a surrogate international company if, as a part of a plan (or collection of associated transactions), three circumstances are happy:

  • the entity completes (after March 4, 2003) the direct or oblique acquisition of considerably all of a U.S. company’s properties or the properties constituting a U.S. partnership’s commerce or enterprise;
  • after the acquisition, at the least 60% of the inventory (by vote or honest market worth) of the buying entity is held by former shareholders of the goal U.S. company by motive of holding inventory within the U.S. company, or by former companions of the U.S. partnership by motive of holding a capital or earnings curiosity within the U.S. partnership; and
  • after the acquisition, the EAG that features the buying entity doesn’t have substantial enterprise actions within the international nation through which that entity was created or organized relative to the EAG’s whole enterprise actions (clarified by reg. section 1.7874-3).

Paragraph (a)(3) coordinates subsections (a) and (b) by offering {that a} company handled as a U.S. company beneath subsection (b) will not be handled as a surrogate international company beneath paragraph (a)(2).

Subsection (b) gives that an inverted company is handled as a U.S. company, even when it wasn’t created or organized in the USA, when the company could be a surrogate international company if paragraph (a)(2) have been utilized utilizing an 80% possession threshold as a substitute of 60%.

Paragraphs (c)(1)-(6) present definitions and particular guidelines. Paragraph (c)(1) defines an EAG by cross-reference to the definition of affiliated EAG in section 1504(a), with modifications. Section 1504(a) defines an affiliated EAG as a number of chains of companies linked via inventory possession with a typical mother or father company if:

  • the frequent mother or father straight owns at the least 80% of the inventory (by vote and FMV) in at the least one of many different companies; and
  • the opposite companies straight personal at the least 80% of the inventory (by vote and FMV) in one another (besides the frequent mother or father).

Paragraph (c)(1) modifies section 1504 by lowering the possession threshold in section 1504(a) to greater than 50% of vote and FMV as a substitute of at the least 80% and by disregarding the exclusion of international companies from affiliated EAGs in section 1504(b)(3).

Subparagraphs (c)(2)(A)-(B) present that, in figuring out whether or not the 60% possession threshold in clause (a)(2)(B)(ii) for surrogate international company standing is met, taxpayers ought to disregard:

  • inventory held by members of the EAG that features the buying international company; or
  • inventory of a international company bought in a public providing associated to the U.S. entity acquisition described in clause (a)(2)(B)(i).

Paragraph (c)(3) assumes a plan is current if a international company acquires considerably all properties of a U.S. company or partnership throughout the four-year interval that begins two years earlier than the 60% possession requirement is met.

An antiavoidance rule in paragraph (c)(4) disregards transfers of properties or liabilities which are a part of a plan to keep away from section 7874.

Paragraph (c)(5) applies the 60% check in clause (a)(2)(B)(ii) to the acquisition of a U.S. partnership commerce or enterprise by treating partnerships beneath frequent management (inside the that means of section 482) as one partnership.

Paragraph (c)(6) grants authority to prescribe regs that assist taxpayers decide whether or not an organization is a surrogate international company.

Paragraphs (d)(1)-(3) present extra definitions. Paragraph (d)(1) defines the relevant interval as starting on the date on which properties are first acquired as a part of the U.S. entity acquisition and ending 10 years after the final date on which properties are acquired.

Paragraph (d)(2) defines inversion achieve and is clarified by reg. section 1.7874-11. Inversion achieve is revenue or achieve acquired by an expatriated entity due to a inventory switch, non-inventory property switch, or license throughout the relevant interval.

If the switch or license happens after the U.S. entity acquisition, it nonetheless generates inversion achieve if the recipient is a international associated individual, outlined in paragraph (d)(3) as associated to the expatriated entity inside the that means of section 267(b) or 707(b)(1), or beneath the identical frequent management because the expatriated entity inside the that means of section 482.

Paragraphs (e)(1)-(4) present particular guidelines that handle tax credit, expatriated partnerships, coordination with internet working loss provisions, and the statute of limitations.

Paragraph (e)(1) limits using tax credit to offset the tax on inversion achieve. Credit (apart from the international tax credit score in section 901) are allowed solely to the extent the tax exceeds the inversion achieve multiplied by the very best tax fee in section 11(b) (or 21%). To find out the FTC allowed by section 901, inversion achieve is handled as U.S.-source revenue.

Paragraph (e)(2) applies when the expatriated entity is a partnership and gives that paragraph (a)(1) applies on the accomplice reasonably than the partnership degree.

A accomplice’s inversion achieve equals its distributive share of the partnership’s inversion achieve plus achieve acknowledged by the accomplice due to the switch of a partnership curiosity to a surrogate international company throughout the relevant interval. Furthermore, the tax is calculated utilizing the very best fee relevant to the accomplice as a substitute of the speed in section 11(b).

Paragraph (e)(3) coordinates the tax on inversion achieve with the choice minimal tax guidelines in section 55 and the NOL guidelines in section 172. It typically limits using NOLs and various tax NOLs to offset inversion positive factors.

Paragraph (e)(4) modifies the statute of limitations for deficiencies attributable to inversion positive factors. The statutory interval for the evaluation of these deficiencies for a pre-inversion 12 months doesn’t expire earlier than the top of three years from the date on which the taxpayer notifies the Treasury secretary of the U.S. entity acquisition associated to the inversion achieve. A pre-inversion 12 months is a tax 12 months that features a portion of the relevant interval and that ends earlier than the 12 months through which the acquisition is accomplished.

Subsection (f) gives {that a} U.S. treaty obligation doesn’t create an exemption from section 7874, whether or not the treaty was entered into earlier than or after the part’s enactment.

Paragraphs (g)(1)-(2) grant authority to supply regs needed to hold out section 7874, together with regs that stop avoidance through the use of associated individuals, passthrough or different noncorporate entities, or different intermediaries, in addition to transactions designed to have individuals stop to be (or not develop into) members of EAGs or associated individuals.

Section 7874 imposes tax on the inversion positive factors of expatriated entities, that are U.S. entities that switch considerably all their properties to surrogate international companies, that are international companies that fulfill the property acquisition, 60% possession, and substantial enterprise actions assessments in subparagraph (a)(2)(B).

Inversion achieve is the revenue acknowledged by an expatriated entity from the switch throughout the relevant interval of inventory or different properties, revenue acquired throughout the relevant interval beneath a license of property as a part of the acquisition, or revenue acquired after the acquisition if the property switch or license is to a international associated individual.

If the 60% possession check is met, the brand new international mother or father will nonetheless be handled as a international company, however the expatriated entity’s taxable revenue can’t be lower than the inversion achieve acknowledged throughout the 10-year relevant interval. Its potential to offset the achieve with FTCs or NOLs is proscribed.

If an 80% possession check in subsection (b) is met, the brand new international mother or father is handled as a U.S. company (not a surrogate international company), and the inversion will not be revered beneath U.S. tax legislation. Furthermore, section 367(a) doesn’t apply to the expatriated entity’s shareholders as a result of no outbound property switch has occurred.

Reg. Sections 1.7874-1 to -12Regs accompanying section 7874 are supplied in reg. sections 1.7874-1 to -12. The steerage gives:

  • guidelines addressing the disregard of affiliate-owned inventory in figuring out possession;
  • clarification of the definition of surrogate international company;
  • an outline of considerable enterprise actions;
  • guidelines addressing the disregard of international buying company inventory associated to a U.S. entity acquisition;
  • an outline of the impact of inventory transfers associated to a U.S. entity acquisition;
  • guidelines addressing inventory transferred by EAG members;
  • guidelines addressing the disregard of inventory attributable to passive belongings;
  • guidelines addressing the disregard of inventory attributable to a number of U.S. entity acquisitions;
  • guidelines addressing the disregard of inventory attributable to third-country transactions;
  • guidelines addressing the disregard of inventory distributions;
  • an outline of inversion achieve; and
  • definitions.

Reg. sections 1.7874-3 and -11 comprise descriptions of enterprise actions and inversion achieve. Reg. section 1.7874-12 gives definitions.

Reg. Section 1.7874-3Reg. section 1.7874-3(a) describes when an EAG will likely be thought of to have substantial enterprise actions within the related international nation in contrast with the EAG’s whole enterprise actions beneath section 7874(a)(2)(B)(iii). The steerage contains:

  • a normal rule for figuring out whether or not an EAG has substantial enterprise actions within the related international nation in contrast with its whole enterprise actions;
  • an outline of things that aren’t taken into consideration as situated or derived within the related international nation;
  • definitions and working guidelines;
  • guidelines for the therapy of partnerships; and
  • applicability dates.

The final rule in reg. section 1.7874-3(b) is that an EAG will likely be thought of to have substantial enterprise actions within the related international nation on the completion date in contrast with the EAG’s whole enterprise actions provided that every of the necessities in subparagraphs (b)(1)-(4) are happy.

The requirement in subparagraph (b)(1) pertains to the amount and compensation of EAG workers. The variety of EAG workers primarily based within the related international nation should be at the least 25% of the whole variety of EAG workers on the relevant date; and the compensation paid to EAG workers primarily based within the related international nation should be at the least 25% of the whole worker compensation for all EAG workers throughout the testing interval.

The requirement in subparagraph (b)(2) pertains to the FMV of EAG belongings. The FMV of the EAG belongings within the related international nation should be at the least 25% of the whole FMV of all EAG belongings on the relevant date.

The requirement in subparagraph (b)(3) pertains to EAG revenue. The EAG revenue derived within the related international nation should be at the least 25% of the whole EAG revenue throughout the testing interval.

The requirement in subparagraph (b)(4) pertains to the tax residence of the international buying company. That company should be a tax resident of the related international nation. Nonetheless, this requirement doesn’t apply if the related international nation doesn’t impose company revenue tax.

Reg. section 1.7874-3(c) describes objects that aren’t thought of in making use of the 25% worker, revenue, and asset assessments in subparagraphs (b)(1)-(3). The final rule in subparagraph (c)(1) is that the next objects are included within the denominator however not the numerator for every of the 25% assessments in subparagraphs (b)(1)-(3):

  • EAG belongings, workers, or revenue attributable to enterprise actions related to properties or liabilities the switch of which is disregarded beneath the antiavoidance rule in section 7874(c)(4);
  • EAG belongings or workers situated in, or revenue derived in, the related international nation as a part of a plan with a principal function of avoiding section 7874; and
  • EAG belongings or workers situated in, or revenue derived in, the related international nation if the EAG belongings, workers, or enterprise actions to which the revenue is attributable are subsequently transferred to a different nation in reference to a plan that existed on the time of the U.S. entity acquisition.

Subparagraph (c)(2) modifies the foundations in subparagraph (c)(1) for transfers of properties to the EAG. EAG belongings, workers, or revenue attributable to enterprise actions related to property that’s transferred to the EAG in a switch that’s disregarded beneath section 7874(c)(4) usually are not included within the numerator or the denominator for every of the 25% assessments in subparagraphs (b)(1)-(3).

Reg. section 1.7874-3(d)(1)(12) gives a number of definitions and particular guidelines that apply along with the definitions in reg. section 1.7874-12.

Subparagraph (d)(1) defines relevant date as both of the next dates utilized persistently:

  • the completion date; or
  • the final day of the month that ends earlier than the month that features the completion date.

Subparagraph (d)(2) defines worker compensation as all quantities incurred by EAG members that straight relate to providers they carry out, together with wages, salaries, deferred compensation, worker advantages, and employer payroll taxes. Compensation for a specific EAG worker is handled as incurred when it could be deductible by the employer as compensation, and the quantity of worker compensation equals the quantity that might be deductible.

Each the timing and the quantity of the deduction for worker compensation should be decided for all EAG workers beneath U.S. tax legislation or primarily based on related non-U.S. tax legislation. Worker compensation is set in U.S. {dollars} and translated utilizing the weighted common trade fee (as outlined in reg. section 1.989(b)-1) for the testing interval.

Subparagraph (d)(3) defines EAG belongings as tangible private or actual property used or held to be used within the lively conduct of a commerce or enterprise by EAG members, supplied the property is both owned or rented by EAG members on the shut of the completion date.

A EAG asset is within the related international nation provided that the asset was bodily current in that nation:

  • on the shut of the completion date; and
  • for extra time than in every other nation throughout the one-year testing interval outlined in subparagraph (d)(12).

Nonetheless, an EAG asset that’s cell in nature and utilized in a transportation exercise (like a vessel, plane, or motorized vehicle) is taken into account to be situated within the related international nation if the asset was bodily current in that nation for extra time than in every other nation throughout the testing interval, no matter whether or not the asset was bodily current in that nation on the shut of the completion date.

EAG belongings should be valued on a gross foundation (not diminished by liabilities) and by persistently utilizing for all EAG belongings both the adjusted tax foundation or FMV decided in U.S. {dollars} and translated on the spot fee decided beneath reg. section 1.988-1(d)(1), (2), and (4).

Tangible private or actual property that’s rented by EAG members from an individual apart from an EAG member is handled as an EAG asset supplied the property is used within the lively conduct of a commerce or enterprise and is being rented by EAG members on the shut of the completion date. An EAG asset that’s rented is valued at eight occasions the online annual hire paid or accrued for the asset by EAG members.

Subparagraph (d)(4) defines EAG workers as all people who’re workers of EAG members.

Whether or not people are workers should be decided for all EAG members beneath U.S. tax legislation or related non-U.S. tax legislation. An EAG worker is predicated within the related international nation provided that the worker spent extra time offering providers in that nation than in every other single nation throughout the testing interval.

Subparagraph (d)(5) defines EAG revenue because the gross revenue of EAG members from transactions occurring within the strange course of enterprise with clients that aren’t associated individuals.

EAG revenue should be decided persistently for all EAG members both beneath U.S. tax legislation or as mirrored in related monetary statements. EAG revenue is translated into U.S. {dollars} utilizing the weighted common trade fee (as outlined in reg. section 1.989(b)-1) for the testing interval. EAG revenue is taken into account derived within the related international nation solely whether it is derived from a transaction with a buyer in that nation.

Subparagraph (d)(6) defines internet annual hire because the annual hire paid or accrued for property minus any funds acquired or accrued from subleasing the property or the same association.

Subparagraph (d)(7) defines associated individual by cross-reference to the greater than 50% possession vote or FMV threshold in section 954(d)(3), however utilized by reference to EAG members reasonably than managed international companies.

Subparagraph (d)(8) defines related monetary statements as monetary statements ready persistently for all EAG members in accordance with both U.S. typically accepted accounting ideas or the worldwide monetary reporting requirements used for the EAG’s consolidated monetary statements.

Nonetheless, if after the U.S. entity acquisition, monetary statements won’t be ready persistently for all EAG members in accordance with both GAAP or IFRS, the related monetary statements are these ready in accordance with both GAAP or IFRS for every member. The related monetary statements should bear in mind revenue objects generated by EAG members over your entire testing interval.

Subparagraph (d)(9) defines related international nation because the nation through which, or beneath the legal guidelines of which, the international buying company was created or organized.

Subparagraph (d)(10) defines related tax legislation because the tax legislation to which the EAG member is topic. This definition applies to find out whether or not a person who performs providers for an EAG member is an worker, and to find out the timing and quantity of worker compensation. Nonetheless, if the tax legislation to which an EAG member is topic doesn’t distinguish between an worker and an unbiased contractor, then the related tax legislation is U.S. federal tax legislation.

Subparagraph (d)(11) defines a tax resident of a rustic as a physique company liable to tax beneath the legal guidelines of the nation as a resident.

Subparagraph (d)(12) defines testing interval because the one-year interval ending on the relevant date outlined in subparagraph (d)(1).

Reg. section 1.7874-3(e)(1)-(2) describes therapy of partnerships in figuring out EAG members and enterprise actions. Beneath subparagraph (e)(1), in figuring out the EAG members, every accomplice in a partnership (decided with out regard to subparagraph (e)(2)) is handled as holding its proportionate share of inventory held by the partnership as calculated beneath sections 701777.

Beneath subparagraph (e)(2), if a number of EAG members (decided after making use of subparagraph (e)(1)) personal an combination of greater than 50% (by FMV) of the pursuits in a partnership, the partnership is handled as an organization that’s an EAG member. Due to this fact, all objects of the partnership are taken into consideration in making use of the enterprise actions assessments. Nonetheless, no partnership objects are thought of except the partnership is handled as an EAG member beneath subparagraph (e)(2).

Reg. section 1.7874-3(f)(1) gives that reg. section 1.7874-3 typically applies to U.S. entity acquisitions which are accomplished on or after June 3, 2015. For acquisitions accomplished earlier than that date, taxpayers are directed to reg. section 1.7874-3T as revised April 1, 2016.

Nonetheless, reg. section 1.7874-3(f)(2) modifies the applicability dates of subparagraphs (b)(4) (tax residence of the international buying company), (d)(8) (definition of related monetary statements), and (d)(11) (definition of tax resident). The primary sentence of paragraph (b)(4) applies to U.S. entity acquisitions accomplished on or after November 19, 2015, and the second sentence applies to U.S. entity acquisitions accomplished on or after July 12, 2018.

Subparagraph (d)(8) applies to U.S. entity acquisitions accomplished on or after April 4, 2016. Subparagraph (d)(11) applies to U.S. entity acquisitions accomplished on or after July 12, 2018.

For U.S. entity acquisitions between June 3, 2015, and April 4, 2016, taxpayers might elect to use subparagraph (d)(8). For U.S. entity acquisitions accomplished between November 19, 2015, and July 12, 2018, taxpayers might elect to use the second sentence of subparagraph (b)(4) and subparagraph (d)(11).

Reg. Section 1.7874-11Reg. section 1.7874-11(a) describes its scope as offering guidelines for figuring out the inversion achieve of an expatriated entity beneath section 7874. The steerage gives:

  • normal guidelines for figuring out the inversion achieve of an expatriated entity;
  • particular guidelines for international partnerships through which an expatriated entity owns an curiosity;
  • definitions;
  • one instance; and
  • applicability dates.

The final rule in reg. section 1.7874-11(b)(1) gives that inversion achieve contains revenue (together with quantities handled as dividends beneath section 78) or achieve acknowledged by an expatriated entity for any tax 12 months that features any portion of the relevant interval due to a direct or oblique switch of inventory or different properties or a license of any property both as a part of the U.S. entity acquisition, or after the acquisition if the switch or license is to a specified associated individual (as outlined in reg. section 1.7874-12(a)(18)).

Subparagraph (b)(2) gives an exception for property described as stock in section 1221(a)(1). Inversion achieve doesn’t embody revenue or achieve acknowledged by motive of the switch or licensing, after the U.S. entity acquisition, of property described in section 1221(a)(1) within the fingers of the transferer or licenser.

Subparagraph (b)(3) modifies the final rule as utilized to partnerships. Besides as supplied in paragraph (c) and section 7874(e)(2), inversion achieve doesn’t embody revenue or achieve acknowledged due to the switch or license of property by a partnership.

Reg. section 1.7874-11(c) additional clarifies the therapy of transfers and licenses by partnerships. If a partnership that may be a international associated individual transfers or licenses property, a accomplice is handled as having transferred or licensed its proportionate share of that property, as decided beneath sections 701777, for calculating the inversion achieve of an expatriated entity.

Taxpayers are directed to section 7874(e)(2) for guidelines concerning the therapy of transfers and licenses by U.S. partnerships and transfers of pursuits in U.S. partnerships.

Reg. section 1.7874-11(d) incorporates by cross-reference the definitions in reg. section 1.7874-12.

Reg. section 1.7874-11(e) gives one instance that illustrates the inversion achieve guidelines in reg. section 1.7874-11. On July 1, 2016, international buying company FA acquires all inventory of home goal company DT in an inversion transaction. When the inversion transaction occurred, DT wholly owned international subsidiary (and CFC) FS.

Through the relevant interval, FS sells to FA property that, within the fingers of FS, will not be described in section 1221(a)(1). Beneath section 951(a)(1)(A), DT has a $80 subpart F revenue inclusion that’s attributable to the FS achieve from the sale of the property.

Beneath part 960(a)(1), DT is deemed to have paid $20 of the post-1986 international revenue taxes of FS by motive of this revenue inclusion and contains $20 in gross revenue as a deemed dividend beneath section 78. DT subsequently acknowledges $100 of gross revenue due to the FS sale of property to FA ($100 = $80 subpart F inclusion + $20 deemed dividend).

Beneath section 7874(a)(2)(A), DT is an expatriated entity. Beneath reg. section 1.7874-11(b)(1), DT’s $100 gross revenue acknowledged beneath sections 951(a)(1)(A) and 78 is inversion achieve, as a result of it’s revenue acknowledged by an expatriated entity throughout the relevant interval by motive of an oblique switch of property by DT (via FS) after the inversion transaction to a specified associated individual (FA).

Sections 7874(a)(1) and (e) subsequently stop using some tax attributes (like NOLs) to scale back the U.S. tax owed on DT’s $100 gross revenue acknowledged beneath sections 951(a)(1)(A) and 78.

Reg. section 1.7874-11(f) gives that reg. section 1.7874-11 applies to transfers and licenses of property accomplished on or after November 19, 2015, however provided that the inversion transaction was accomplished on or after September 22, 2014.

For inversion transactions accomplished on or after that date, nonetheless, taxpayers might elect to use paragraph (b) by excluding the reference to dividends beneath section 78 for transfers and licenses of property accomplished between November 19, 2015, and April 4, 2016.

Reg. Section 1.7874-12Reg. section 1.7874-12(a)(1)(20) gives definitions that apply to reg. sections 1.7874-1 via -11, and reg. sections 1.367(b)-4 (acquisition of international company inventory or belongings by international companies in nonrecognition transactions), 1.956-2 (definition of U.S. property), and 1.7701(l)-4 (definitions and guidelines for inversion transactions).

Subparagraph (a)(1) defines an affiliated group by reference to section 1504(a), however with modifications that disregard the international company exclusion in section 1504(b)(3), and scale back the possession threshold in section 1504(a) to greater than 50% from at the least 80%. A member of the affiliated group is an entity included within the affiliated group.

Subparagraph (a)(2) defines the relevant interval because the 10-year interval described in section 7874(d)(1). Nonetheless, particular guidelines in reg. section 1.7874-2(b)(13) apply when a subsequent acquisition (or the same acquisition beneath reg. section 1.7874-2(c)(4)(i)) happens that can also be an inversion transaction. In that case, the relevant interval begins on the primary date that properties are acquired as a part of the preliminary acquisition.

Subparagraph (a)(3) defines the completion date because the date on which the U.S. entity acquisition and all transactions associated to the U.S. entity acquisition are full.

Subparagraph (a)(4) defines a CFC by cross-reference to section 957.

Subparagraph (a)(5) defines a home entity acquisition as an acquisition described in section 7874(a)(2)(B)(i), or the acquisition of considerably all properties held by a U.S. company or constituting a commerce or enterprise of a U.S. partnership.

Subparagraph (a)(6) defines a home entity as a U.S. company or partnership described in section 7874(a)(2)(B)(i). A reference to a U.S. entity features a successor, together with an organization that succeeds to and takes into consideration quantities of the U.S. entity beneath section 381 (requiring an buying company to succeed to 26 tax objects listed in section 381(c) of the transferer company within the case of an asset acquisition that may be a liquidation or reorganization).

Subparagraph (a)(7) defines an EAG as an affiliated group that features the international buying company (decided as of the completion date). A member of the EAG is an entity included within the EAG. A reference to an EAG member contains the member’s predecessor.

Subparagraph (a)(8) defines an expatriated entity because the acquired U.S. entity and a U.S. individual that, on any date on or after the completion date, is or was associated to the U.S. entity (inside the that means of section 267(b) or 707(b)(1)).

Subparagraph (a)(9) defines an expatriated international subsidiary (EFS), which is related to the therapy of post-inversion transactions beneath reg. sections 1.956-2(a)(4), 1.7701(l)-4(c)(d), and 1.367(b)-4(e)-(f).

The definition disregards any utility of the constructive possession guidelines in section 318(a)(3)(A)(C) that might deal with a U.S. individual as proudly owning inventory truly owned by a non-U.S. individual in figuring out whether or not the examined international company is a CFC; an individual is a U.S. shareholder of the CFC; or the examined international company is an EAG member.

Section 318(a)(3)(A)(C) attributes inventory possession from companions, beneficiaries, grantors, and shareholders to partnerships, estates, trusts, and companies.

The final rule in subdivision (a)(9)(i) defines an EFS as a international company:

  • that may be a CFC (decided with out making use of section 318(a)(3)(A)(C) so {that a} U.S. individual is taken into account to personal inventory owned by a non-U.S. individual); and
  • through which an expatriated entity is a U.S. shareholder (decided with out making use of section 318(a)(3)(A)(C) so {that a} U.S. individual is taken into account to personal inventory owned by a non-U.S. individual).

Subdivision (a)(9)(ii) gives an exception to the final definition of an EFS in subdivision (a)(9)(i). A international company will not be an EFS if, due to an inversion transaction that might in any other case trigger the international company to be an EFS:

  • on the completion date, the international company was each a CFC (decided with out making use of section 318(a)(3)(A)(C) in order to think about a U.S. individual as proudly owning inventory owned by a non-U.S. individual) and a member of the EAG; and
  • on or earlier than the completion date the U.S. entity was not a U.S. shareholder (decided with out making use of section 318(a)(3)(A)(C) in order to think about a U.S. individual as proudly owning inventory owned by a non-U.S. individual) of the international company.

Subparagraph (a)(10) defines a international buying company because the international company described in section 7874(a)(2)(B). A reference to a international buying company features a successor, together with an organization that succeeds to and takes into consideration quantities of the international buying company beneath section 381.

Subparagraph (a)(11) defines a international associated individual as a international individual that’s associated to the expatriated entity (inside the that means of section 267(b) or 707(b)(1)) or is beneath the identical frequent management (inside the that means of section 482).

Subparagraph (a)(12) defines a former U.S. entity accomplice of a U.S. partnership as an individual that held an curiosity within the partnership earlier than the U.S. entity acquisition, together with an individual that holds an curiosity within the partnership each earlier than and after the U.S. entity acquisition.

Subparagraph (a)(13) defines a former U.S. entity shareholder of a U.S. company as an individual that held inventory within the U.S. company earlier than the U.S. entity acquisition, together with an individual that holds inventory within the U.S. company each earlier than and after the U.S. entity acquisition.

Subparagraph (a)(14) defines an curiosity in a partnership to incorporate a capital or earnings curiosity.

Subparagraph (a)(15) defines an inversion transaction as a U.S. entity acquisition through which the international buying company is handled as a surrogate international company beneath section 7874(a)(2)(B), making an allowance for section 7874(a)(3).

Subparagraph (a)(16) defines a non-EFS international associated individual as a international associated individual that’s not an EFS.

Subparagraph (a)(17) defines the possession fraction because the possession share described in section 7874(a)(2)(B)(ii) expressed as a fraction.

Subparagraph (a)(18) defines a specified associated individual as:

  • a non-EFS international associated individual;
  • a U.S. partnership through which a non-EFS international associated individual is a accomplice; and
  • a U.S. belief having a non-EFS international associated individual as a beneficiary.

Subparagraph (a)(19) defines a U.S. individual as an individual described in section 7701(a)(30). This contains U.S. residents, residents, partnerships, and companies.

Subparagraph (a)(20) defines a U.S. shareholder by cross-reference to section 951(b).

Reg. section 1.7874-10(b) gives that reg. section 1.7874-12 typically applies to U.S. entity acquisitions accomplished on or after September 22, 2014, except an exception applies.

The next provisions apply solely to U.S. entity acquisitions accomplished on or after April 4, 2016: subparagraph (a)(8) (definition of expatriated entity), the reference in subparagraph (a)(6) (definition of home entity) to companies that succeed to and bear in mind quantities of home entities beneath section 381, and the second sentence of paragraph (a)(10) (referring to successor companies of international buying companies). Nonetheless, taxpayers might elect to use these provisions to U.S. entity acquisitions accomplished between September 22, 2014, and April 4, 2016.

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