KPMG report: Phantom inversions under section 7874

How rules concerning disqualified stock and non-ordinary-course distributions can create an inversion under section 7874

Rules concerning disqualified stock and non-ordinary-course distributions

The U.S. anti-inversion rules under section 7874 apply to an acquisition of a domestic entity by a foreign acquiring corporation only if after the acquisition at least 60% of the stock (by vote or value) of the foreign corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation or  by former partners of a domestic partnership by reason of holding a capital or profits interest in the domestic partnership. Thus, it would seem that section 7874 would apply only if most (or at least a good portion) of the purchase consideration consists of share consideration that provides the domestic entity owners with a continuing proprietary interest in the foreign acquiring corporation. However, section 7874 can cause a foreign acquiring corporation to be viewed as a surrogate foreign corporation (or as a domestic corporation under section 7874(b)) even when the purchase consideration consists entirely of cash or other non-stock consideration.

Read an April 2024 report* prepared by KPMG LLP tax professionals that explains how the rules concerning disqualified stock and non-ordinary-course distributions can inappropriately create an inversion under section 7874 and how amending the safe harbor de minimis exception would address the issue.

* This article originally appeared in Tax Notes Federal (April 22, 2024) and is provided with permission.



The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 3712, 1801 K Street NW, Washington, DC 20006.