Treasury and IRS Issue Final Anti-Inversion Regulations

Summary

On July 12, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) published final regulations (TD 9834, hereinafter, the Final Regulations) that address transactions that are structured to avoid the purposes of Sections 7874 and 367 and certain post-inversion tax avoidance transactions. These regulations affect certain domestic corporations and partnerships whose assets are directly or indirectly acquired by a foreign corporation and certain persons related to such domestic corporations and partnerships.

 

Details

On April 8, 2016, Treasury published final and temporary regulations under Sections 304, 367, 956, 7701(l) and 7874 (TD 9761) and also published a notice of proposed rulemaking (REG-135734-14) by cross-reference to the temporary regulations (the 2016 Proposed Regulations, and together with the final and temporary regulations described in the preceding sentence, the 2016 Regulations).

On January 18, 2017, Treasury published final and temporary regulations under Section 7874 (TD 9812), which adopted as final regulations the proposed regulations in Treas. Reg. §1.7874-4 (including the portions included in the 2016 Regulations) and modified certain portions of the 2016 Regulations.
 
TD 9834 adopts the remaining 2016 Proposed Regulations, with certain modifications, as final regulations and removes the corresponding temporary regulations.
 
The modifications made to the 2016 Proposed Regulations in the Final Regulations are largely in response to comments received by Treasury. These modifications include certain changes or clarifications to calculating the Section 7874 ownership percentage when applying the “passive assets rule” in former Temp. Reg. §1.7874-7T, the “serial acquisition rule” in former Temp. Reg. §1.7874-8T, the “third-country rule” in former Temp. Reg. §1.7874-9T, the “non-ordinary course distribution rule” in former Temp. Reg. §1.7874-10T, and certain de minimis exceptions included in the 2016 Regulations.
 
In addition, the Final Regulations broaden existing rules under Section 7874 that coordinate the application of (i) rules that disregard certain stock of the foreign acquiring corporation for purposes of determining the Section 7874 ownership fraction, with (ii) the expanded affiliated group (EAG) rules.^[1]
 
The Final Regulations also make certain modifications and clarifications to the substantial business activities test in former Temp. Reg. §1.7874-3 along with certain modifications to rules addressing certain post-inversion tax avoidance transactions. 
 
Lastly, the Final Regulations adopt certain definitions and update other portions of the Section 7874 regulations to conform those sections with the nomenclature used in Treas. Reg. §1.7874-12.
 
The Final Regulations are effective on July 12, 2018. It should be noted however, that certain sections of the Final Regulations have different applicability dates. The preamble to the Final Regulations states that the applicability date of the rules in the Final Regulations are generally the same as the applicability dates of the rules as set forth in the 2016 Regulations, which were issued as temporary regulations to address transactions that are structured to avoid the purposes of Section 7874 and 367 and certain post-inversion tax avoidance transactions. The preamble further states that differences between the Final Regulations and the 2016 Regulations generally apply on a prospective basis. The preamble also provides that because taxpayers may have relied on the 2016 Regulations, the modifications to the Final Regulations generally apply prospectively. However, domestic entity acquisitions completed before July 12, 2018, continue to be subject to those rules as set forth in the 2016 Regulations (but generally with an option for taxpayers to apply the differences retroactively).
 
For dates of applicability, see Treas. Reg. §§1.304-7(e), 1.367(a)-3(c)(11)(ii), 1.367(b)-4(h), 1.956-2(i), 1.7701(l)-4(h), 1.7874-1(i)(2), 1.7874-2(l)(2),1.7874-3(f)(2), 1.7874-6(h), 1.7874-7(g), 1.7874-8(i), 1.7874-9(g), 1.7874-10(l), 1.7874-11(f), and 1.7874-12(b).
 
For additional details regarding the Final Regulations see TD 9834. 

BDO Insights

Despite certain modifications, the Final Regulations generally retain the underlying policy and framework of the 2016 Regulations. BDO can assist clients in reviewing the application of these complex and detailed rules.