Prevention of corporate expatriation to avoid United States income tax

(a)

In general

Paragraph (4) of section 7701(a) of the Internal Revenue Code of 1986 (defining domestic) is amended to read as follows:

(4)

Domestic

(A)

In general

Except as provided in subparagraph (B), the term domestic when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations. (B)

Certain corporations treated as domestic

(i)

In general

The acquiring corporation in a corporate expatriation transaction shall be treated as a domestic corporation. (ii)

Corporate expatriation transaction

For purposes of this subparagraph, the term corporate expatriation transaction means any transaction if— (I)a nominally foreign corporation (referred to in this subparagraph as the acquiring corporation) acquires, as a result of such transaction, directly or indirectly substantially all of the properties held directly or indirectly by a domestic corporation, and (II)immediately after the transaction, more than 80 percent of the stock (by vote or value) of the acquiring corporation is held by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation. (iii)

Lower stock ownership requirement in certain cases

Subclause (II) of clause (ii) shall be applied by substituting 50 percent for 80 percent with respect to any nominally foreign corporation if— (I)such corporation does not have substantial business activities (when compared to the total business activities of the expanded affiliated group) in the foreign country in which or under the law of which the corporation is created or organized, and (II)the stock of the corporation is publicly traded and the principal market for the public trading of such stock is in the United States. (iv)

Partnership transactions

The term corporate expatriation transaction includes any transaction if— (I)a nominally foreign corporation (referred to in this subparagraph as the acquiring corporation) acquires, as a result of such transaction, directly or indirectly properties constituting a trade or business of a domestic partnership, (II)immediately after the transaction, more than 80 percent of the stock (by vote or value) of the acquiring corporation is held by former partners of the domestic partnership or related foreign partnerships (determined without regard to stock of the acquiring corporation which is sold in a public offering related to the transaction), and (III)the acquiring corporation meets the requirements of subclauses (I) and (II) of clause (iii). (v)

Special rules

For purposes of this subparagraph— (I)a series of related transactions shall be treated as 1 transaction, and (II)stock held by members of the expanded affiliated group which includes the acquiring corporation shall not be taken into account in determining ownership. (vi)

Other definitions

For purposes of this subparagraph— (I)

Nominally foreign corporation

The term nominally foreign corporation means any corporation which would (but for this subparagraph) be treated as a foreign corporation. (II)

Expanded affiliated group

The term expanded affiliated group means an affiliated group (as defined in section 1504(a) without regard to section 1504(b)). (III)

Related foreign partnership

A foreign partnership is related to a domestic partnership if they are under common control (within the meaning of section 482), or they shared the same trademark or tradename.

(b)

Effective dates

(1)

In general

The amendment made by this section shall apply to corporate expatriation transactions completed after September 11, 2001. (2)

Special rule

The amendment made by this section shall also apply to corporate expatriation transactions completed on or before September 11, 2001, but only with respect to taxable years of the acquiring corporation beginning after December 31, 2005.