“To amend the Internal Revenue Code of 1986 to modify the rules relating to inverted corporations.”
No CRS summary available for this bill.
This section revises IRC §7874 to treat additional foreign corporations as domestic for federal income tax purposes, effective for taxable years ending after May 8, 2014. (As background, §7874 generally addresses corporate inversions, under which a U.S. corporation restructures via merger with a foreign corporation to shift its tax residence abroad and reduce U.S. tax liability; it currently treats a foreign corporation as a surrogate foreign corporation—and thus subject to U.S. tax on worldwide income—if, after such a transaction, at least 60% of its stock is held by former shareholders of the U.S. corporation, with those meeting an 80% threshold treated as fully domestic.) The revision replaces prior rules by treating a foreign corporation as domestic if (1) it would qualify as a surrogate foreign corporation under an 80% stock ownership threshold by former U.S. shareholders (from 60%), or (2) it is an "inverted domestic corporation," defined as one that after May 8, 2014, acquires substantially all the properties of a domestic corporation or partnership where, afterward, more than 50% of its stock (by vote or value) is held by former shareholders or partners, or the expanded affiliated group including the entity is managed and controlled primarily within the U.S. (based primarily on the location of executive officers and senior management) and has significant domestic business activities (i.e., at least 25% of employees, employee compensation, assets, or income located or incurred in the U.S.). (Thus, the changes lower the stock ownership threshold triggering domestic treatment from 80% to 50% for certain post-May 8, 2014, acquisitions and add a management/control alternative test.) An exception applies if the expanded affiliated group has substantial business activities (as defined under prior regulations, with possible increases to thresholds) in the foreign corporation's country of organization. Conforming amendments limit prior surrogate foreign corporation rules to acquisitions before May 8, 2014, and update cross-references.