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Inversion Regulations: The Illusory “Safe Harbor”

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


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?


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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