Final US anti-inversion regulations published June 4 retain the 25 percent bright-line test of temporary and proposed versions of the regulations for determining if an expanded affiliated group (EAG) is considered to have substantial business activities in a foreign country.
The regulations (T.D. 9720) are key to determining if a foreign firm acquiring a US business can avoid being caught by the anti-inversion rules of section 7874. If the foreign firm can prove that its EAG is engaged in substantial business activities in the foreign corporation’s country of organization following acquisition of the US company, it will not be subject to the tax burdens imposed by section 7874 .
As in 2012 temporary (T.D. 9592) and proposed (REG-112994-06) regulations, the final regs state that the EAG will be considered to have substantial business activities in a foreign country only if at least 25 percent of the group employees, group assets, and group income are located or derived in the relevant foreign country.
Some modifications to the 2012 temporary regs were made in the final version of the regs.
Under the final regs, for purposes of determining if a corporation is a member of the EAG, each partner in a partnership is treated as holding its proportionate share of the stock held by the partnership.
Also, an antiabuse rule is modified with respect to items associated with a transfer of property to the EAG that are disregarded under section 7874(c)(4).
Changes to the group employee test include new rules for determining when individuals are considered employees, and for determining the amount and timing of employee compensation. The final regs also modify the group asset test to provide relief for mobile assets.
The final regs also provide that group income must be determined consistently for all members of the EAG using either US federal income tax principles or relevant financial statements.
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