Cross-Border Business Combinations

Section 367 inversion rules, though not without their faults, were largely successful in preventing inversions until 2001 through 2002, when a combination of increasingly tax-indifferent shareholders and falling stock prices largely eviscerated the Section 367 deterrent. Section 7874 impacts the expatriating US corporation rather than its shareholders. If the shareholders of the US corporation own at least 60% of the foreign corporation by reason of being former shareholders of the US corporation, and the Asset Test and Business Activities Test are satisfied, such foreign corporation is referred to as a surrogate foreign corporation. It is clear from the first set of Section 7874 regulations that much more guidance is needed. One very small step in the direction of tax simplification which should not be controversial would be to eliminate the Section 367(a) gain recognition agreement requirement for 5% shareholders. It is a trap for the unwary that can often be avoided by the check-the-box rules.