Inversion Regulations: The Illusory “Safe Harbor”

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Author(s): Rufus Rhoad­es and Alex­ey Man­a­suev Date: Sep­tem­ber 2012

Intro­duc­tion.

This Emerg­ing Issues Analy­sis (EIA) deals with the recent­ly issued tem­po­rary reg­u­la­tions (Temp. Treas. Reg. § 1.7874–3T(a) (June 12, 2012)) relat­ing to cor­po­rate inver­sions.

This sum­mer (June 7, 2012), Trea­sury issued tem­po­rary and pro­posed (T.D. 9592) and final (T.D. 9591) reg­u­la­tions under I.R.C. 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?

Back­ground.

A domes­tic cor­po­ra­tion that changes its place of domi­cile to a for­eign juris­dic­tion (usu­al­ly, one with low­er tax­es) is said to have “invert­ed”. So, a dis­cus­sion of cor­po­rate “inver­sions” is a dis­cus­sion about cor­po­ra­tions that have made that switch.

Because the dri­ving force behind cor­po­rate inver­sions was almost always the tax ben­e­fit from the move, Con­gress, in the mid­dle of the last decade, enact­ed I.R.C. Sec­tion 7874 to attack cor­po­rate inver­sions. Con­gress gave Trea­sury broad author­i­ty to issue the com­pre­hen­sive reg­u­la­tions.

How the Anti-inver­sion Rule Works.

80 Per­cent or More Own­er­ship Test. I.R.C. 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 …

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