Corporate Expatriation Transactions: IRS and Treasury Issue Final Regulations on the “Substantial Business Activities” Exception to Section 7874

Sullivan & Cromwell LLP - June 4, 2015

On June 3, 2015, the IRS and Treasury Department released final regulations (the “Regulations”) adopting the 2012 temporary regulations’ exclusive bright-line rule to determine when a foreign corporation or publicly traded foreign partnership will be covered by the “substantial business activities” exception to the definition of a “surrogate foreign corporation,” subject to a few modifications, additions and clarifications. Under the bright-line rule, an “expanded affiliated group” will have substantial business activities in a foreign country only if at least 25% of the group’s employees (both by head count and compensation), gross tangible assets, and gross income are located or derived in the foreign country.

The Regulations apply to acquisitions that are completed on or after June 3, 2015.