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Recently issued final and temporary regulations under section 7874 make unexpected changes from prior regulations and will have a major impact on U.S. headquartered multinational enterprises' ability to become foreign corporations. Significantly, the temporary regulations remove a facts and circumstances test to determine that substantial business activities occur in the foreign company’s home country, which excuses a company from the provisions of section 7874, and which has been a feature of the regulations since they were first introduced in 2006. The new rules substitute a purely quantitative, 25 percent threshold for substantial business activities. Many practitioners question whether the new test could ever be met, given the wide geographic dispersion of multinational groups' employees, assets and income.
The final regulations also now expressly bring downstream mergers under section 7874, and make changes to the way options are treated.
Sutherland Partner Carol P. Tello joins panelists discussing:
The operation and significance of the new substantial business activities test
How the final regulations change 2009 rules concerning options
Downstream mergers of a U.S. corporation into a foreign subsidiary
Common traps under Section 7874
Transactions that are still viable
What’s next – Summer regulations implementing Notice 2009-78?