IRS Issues Regulations On Section 7874 Inversion Transactions

The IRS has issued temporary and proposed regulations (T.D. 9592 and REG-107889-12) adopting a bright line test for determining whether a foreign corporation satisfies the substantial business activities test of Section 7874(a)(2)(B)(iii) to avoid treatment as an inverted corporation. The IRS also finalized regulations (T.D. 9591) under other areas of Section 7874.

The bright line test in the new temporary regulations replaces temporary regulations in 2009, which permitted the determination of whether an expanded affiliated group (EAG) has substantial business activities in the relevant foreign jurisdiction to be based on all the facts and circumstances.

Under the new temporary regulation, an EAG will have substantial business activities in the relevant foreign country only if at least 25 percent of each of the group employees, group assets and group income are located in or derived in the relevant foreign country, determined as follows: