International Tax

Corporate

Corporations based in the U.S. are hampered with a substantial amount of federal income tax and compliance burdens. This has led to aggressive strategic tax planning to improve company profits. Prior to 2003, one of the more common approaches to generate tax savings for U.S. corporate tax payers was to have their income from foreign operations taxed at the lower tax rates of a foreign country. This was accomplished by having the U.S. Corporation, and its foreign subsidiary, undergo an “inversion” allowing the foreign corporation to become the parent corporation and the U.S. operation its subsidiary. By shifting the organization and control to a foreign jurisdiction, the tax savings allowed multi-national corporations to be more competitive in the global marketplace.

In order to eliminate the tax advantage of these corporate inversions, the IRS enacted the anti-inversion rule, Section 7874 of the Code which disregards reorganizations that cannot show that the U.S. subsidiary’s foreign parent engages in substantial business activities in a foreign country. IRC Section 7874(a)(2)(B) stipulates that to avoid the adverse tax consequences of the anti-inversion rules, a U.S. corporation must acquire new shareholders to own at least 40% of the business after the reorganization or the foreign acquiring company must have more substantial business activities in its home (foreign) country than the U.S. business. The regulations for Section 7874 have changed a number of times since 2003, examples of the “substantial business activity” test have been eliminated and the safe harbor provision has been removed making it even more difficult to determine if an inversion will be allowed or disregarded for tax purposes under Section 7874.

If your company has undergone an inversion or is contemplating an inversion, Esquire Group can help you stay in compliance with IRS rules and regulations.