 U.S. Rules on Corporate Expatriations Carl Dubert 16 April 2009

PricewaterhouseCoopers 16 April 2009 Seite 2 Washington, DC Where do corporations live? Expatriate: -To withdraw from residence in or allegiance to one‘s native country Query: -What is the „native country“ of a multinational corporation? Corporate Expatriation -Changing the location of corporate tax residence of the parent of a multinational group of companies

PricewaterhouseCoopers 16 April 2009 Seite 3 Washington, DC U.S. Rules on Corporate Tax Residence Place of Incorporation Theory -Domestic: if organized under U.S. law or under the law of a U.S. State -Foreign: if organized solely under foreign law Most other countries follow different theories (e.g., place of management)

PricewaterhouseCoopers 16 April 2009 Seite 4 Washington, DC Initial Response to Corporate Expatriations – IRC § 367(a) Complex set of rules, with significant modifications in 1986 & Current taxation of gains at shareholder level, or -Current taxation of gains at corporate level Issue: -In a down market, i.e., when gains are small or nil, current taxation is not an effective barrier to expatriation

PricewaterhouseCoopers 16 April 2009 Seite 5 Washington, DC Latest Response to Corporate Expatriations – IRC § 7874 New statutory framework enacted in Domestication of the foreign acquiring corporation (80% ownership), or -Limits on use of U.S. tax attributes (60% ownership) Implementing regulations have both narrowed and broadened the scope -Some key terms still undefined

PricewaterhouseCoopers 16 April 2009 Seite 6 Washington, DC Inversions under IRC § 7874 Classic Inversion (Example) US F Shareholders Tax Haven USF

PricewaterhouseCoopers 16 April 2009 Seite 7 Washington, DC Inversions under IRC § 7874 Successful Inversion (Example) US F Shareholders Country X USF Group has 10% of employees, assets & sales in Country X.

PricewaterhouseCoopers 16 April 2009 Seite 8 Washington, DC Inversions under IRC § 7874 Accidental Inversion (Example 1) USA D1D2 N F N D1D2 USA 60% 40% F

PricewaterhouseCoopers 16 April 2009 Seite 9 Washington, DC Inversions under IRC § 7874 Accidental Inversion (Example 2) N D1D2 USA 60% 40% USA D1D2 60% 40%

PricewaterhouseCoopers 16 April 2009 Seite 10 Washington, DC Inversions under IRC § 7874 Accidental Inversion (Example 3) – or perhaps not N D1D2 US1 D1D2 US2

PricewaterhouseCoopers 16 April 2009 Seite 11 Washington, DC Inversions under IRC § 7874 Accidental Inversion (Example 4) N USA Nonresident alien

PricewaterhouseCoopers 16 April 2009 Seite 12 Washington, DC Inversions under IRC § 7874 Accidental Inversion (Example 5) Investors USP FP Foreign Business Investors USP Foreign Business N Investors FC