Bill seeks to halt corporate inversions

Sens. Dianne Feinstein (D-CA), Dick Durbin (D-IL) and Jack Reed (D-RI) introduced last week a measure designed to eliminate corporate inversions, which allow companies to shift corporate citizenship to a low-tax foreign jurisdiction while keeping domestic bases.

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The Stop Corporate Inversions Act would close the tax loophole allowing companies to acquire smaller foreign companies and move their tax home to a foreign jurisdiction as part of the overall transaction to avoid paying taxes.

Congress enacted Section 7874 of the Internal Revenue Code in 2004 to discourage companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction as part of the overall transaction.

Under the bill’s provision officials a combined foreign corporation would be treated as a domestic corporation under two circumstances – if shareholders of the former U.S. corporation own more than 50 percent of the new combined foreign corporation or if the affiliated group that includes the combined foreign corporation is managed and controlled in the United States and engages in significant domestic business activities in the United States.

The bill, which officials said is endorsed Americans for Tax Fairness, maintains the foreign substantial business exception under Section 7874 by exempting the affiliated group if it has substantial business activities in the foreign country where the new combined corporation is incorporated.