HR7493-119

What This Bill Does

The bill rewrites section 7874(b) so a foreign corporation is treated as domestic if it would be a surrogate foreign corporation under an 80 percent test or qualifies as an inverted domestic corporation. The new inverted-corporation test reaches acquisitions after May 8, 2014 where a foreign entity acquires substantially all assets or properties of a domestic corporation or partnership and either former U.S. owners hold more than 50 percent of stock, or management and control occurs primarily in the United States while the group has significant domestic business activities. The bill defines significant domestic business activity using 25 percent thresholds for U.S. employees, compensation, assets, or income, preserves an exception for substantial business activities in the foreign country of organization, and authorizes Treasury regulations.

Who Benefits and How

Federal taxpayers and domestic competitors benefit if fewer multinational groups can reduce U.S. tax by relocating formal corporate residence abroad while keeping U.S. ownership, management, assets, employees, or income. IRS enforcement staff benefit from clearer tests for management and control and domestic business activities. U.S.-based workers and domestic businesses may benefit if the bill reduces tax-driven incentives to invert.

Who Bears the Burden and How

Multinational corporations, foreign acquiring corporations, former shareholders, executive officers, senior management, tax planners, and M&A advisers face tighter inversion thresholds, greater U.S. domestic-corporation treatment risk, and more documentation around ownership, management location, employees, compensation, assets, income, and foreign-country business activities. Treasury and IRS must write and administer regulations, including rules that can raise foreign substantial-business thresholds or lower U.S. significant-business thresholds.

Key Provisions

• Treats certain foreign acquiring corporations as domestic corporations under an 80 percent surrogate-foreign-corporation test.
• Creates an inverted domestic corporation rule for post-May 8, 2014 acquisitions with more than 50 percent former U.S. ownership.
• Applies inversion treatment when management and control remains primarily in the United States and the group has significant domestic business activities.
• Defines significant domestic business activity using 25 percent U.S. employee, compensation, asset, or income thresholds.
• Authorizes Treasury regulations and applies amendments to taxable years ending after May 8, 2014.