[Federal Register Volume 70, Number 145 (Friday, July 29, 2005)]
[Rules and Regulations]
[Pages 43757-43760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-15059]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9216]
RIN 1545-BD06


Treatment of a Stapled Foreign Corporation under Sections 269B 
and 367(b)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning the 
definition and tax treatment of a stapled foreign corporation, which 
generally is treated for tax purposes as a domestic corporation under 
section 269B of the Internal Revenue Code.

DATES: Effective Date: These regulations are effective on July 29, 
2005.
    Applicability Dates: For dates of applicability, see Sec.  1.269B-
1(g).

FOR FURTHER INFORMATION CONTACT: Richard L. Osborne at (202) 435-5230 
or Robert W. Lorence at (202) 622-3918 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    On September 7, 2004, the IRS and Treasury Department published in 
the Federal Register a notice of proposed rulemaking [REG-101282-04; 
2004-42 I.R.B. 698; 69 FR 54067] under sections 269B and 367(b) of the 
Internal Revenue Code (Code). The proposed regulations provide guidance 
concerning the definition and tax treatment of a stapled foreign 
corporation, which generally is treated for tax purposes as a domestic 
corporation under section 269B of the Code. The proposed regulations 
are finalized here without modification.

Explanation of Provisions and Summary of Comments

    Section 269B(a)(1) provides that, if a domestic corporation and a 
foreign corporation are stapled entities, the foreign corporation will 
be treated as a domestic corporation for U.S. Federal income tax 
purposes, unless otherwise provided in regulations. A domestic and a 
foreign corporation are stapled entities

[[Page 43758]]

if more than 50 percent in value of the beneficial ownership in each 
corporation consists of stapled interests. Interests are stapled if, by 
reason of form of ownership, restrictions on transfer, or other terms 
and conditions, in connection with the transfer of one of such 
interests, the other interests are also transferred or required to be 
transferred.
    The IRS and Treasury Department received only one written comment 
with respect to the proposed regulations under section 269B. The 
comment requests guidance on the potential application of the 
regulations to so-called dual listed corporations (also referred to as 
dual company structures or virtual mergers). As described in the 
comment, dual listed corporations typically are two separately traded 
public corporations that enter into various equalization and voting 
agreements, with the result that the operations of each company 
generally are managed through a common governance structure. The 
comment provides that the structure does not involve an actual 
shareholder level exchange of shares, and that the companies remain 
separately traded, but that by reason of the equalization and voting 
agreements, the shares in each company generally reflect the combined 
economics of the two companies. The comment also indicates that these 
dual listed structures are generally motivated by non-tax business 
reasons (including avoiding the adverse market effect known as the 
flowback of shares that can occur in cross border acquisitions).
    The commentators state that they are not aware of a dual listed 
structure involving a domestic corporation and a foreign corporation, 
but nonetheless believe that such a transaction is a possibility. 
Further, the commentators believe that section 269B and the regulations 
should not be interpreted to apply to such a dual listed structure. 
Accordingly, the commentators request that the final regulations (1) 
provide that the voting arrangements that are part of these 
transactions do not involve the stapling of beneficial ownership within 
the meaning of section 269B; and (2) provide a de minimis exception to 
the aggregate rule of Sec.  1.269B-1(b)(1) of the proposed regulations.
    After consideration of the comment discussed above, the IRS and the 
Treasury Department have decided at this time to adopt the proposed 
regulations as final regulations without modification. However, the IRS 
and the Treasury Department believe that further study of dual listed 
structures is warranted and request more detailed comments on the 
application of section 269B and the underlying regulations to these 
structures, including discussion of particular facts and circumstances 
that should and should not be considered, in regard to each 
corporation's beneficial ownership for purposes of determining whether 
the dual listed corporations are stapled entities. These comments 
should take into account the need to protect the government's interests 
in this area, particularly in light of the policies underlying section 
269B and the recent enactment of section 7874, relating to rules 
applicable to expatriated entities and their foreign parent 
corporations. Consideration also should be given to appropriate 
limitations on any proposed exceptions. Pending the issuance of any 
further published guidance, the IRS will consider the application of 
section 269B and the underlying regulations to dual listed structures 
on a case by case basis.
    Further, the IRS and Treasury Department remain concerned about 10-
percent shareholders interposing entities in order to avoid collection 
under Sec.  1.269B-1(f) of the final regulations. Accordingly, the 
final regulations retain the reserved section for rules regarding tax 
assessment and collection from 10-percent indirect owners of stapled 
foreign corporations. The IRS and Treasury Department will continue to 
consider such situations and request comments on how to address the 
issue in subsequent guidance.

Special Analyses

    The IRS and the Treasury Department have determined that the 
adoption of these regulations is not a significant regulatory action as 
defined in Executive Order 12866. Therefore, a regulatory assessment is 
not required. It has also been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these regulations, and that because this regulation does not impose a 
collection of information on small entities, the Regulatory Flexibility 
Act (5 U.S.C. chapter 6) does not apply. Pursuant to section 7805(f) of 
the Code, the notice of proposed rulemaking was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Richard L. Osborne, of 
the Office of Associate Chief Counsel (International). However, other 
personnel from the IRS and Treasury Department participated in their 
development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting, and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.269B(b)-1 also issued under 26 U.S.C. 269B(b).


0
Par. 2. Section 1.269B-1 is added to read as follows:


Sec.  1.269B-1  Stapled foreign corporations.

    (a) Treatment as a domestic corporation--(1) General rule. Except 
as otherwise provided, if a foreign corporation is a stapled foreign 
corporation within the meaning of paragraph (b)(1) of this section, 
such foreign corporation will be treated as a domestic corporation for 
U.S. Federal income tax purposes. Accordingly, for example, the 
worldwide income of such corporation will be subject to the tax imposed 
by section 11. For application of the branch profits tax under section 
884, and application of sections 871(a), 881, 1441, and 1442 to 
dividends and interest paid by a stapled foreign corporation, see 
Sec. Sec.  1.884-1(h) and 1.884-4(d).
    (2) Foreign owned exception. Paragraph (a)(1) of this section will 
not apply if a foreign corporation and a domestic corporation are 
stapled entities (as provided in paragraph (b) of this section) and 
such foreign and domestic corporations are foreign owned within the 
meaning of this paragraph (a)(2). A corporation will be treated as 
foreign owned if it is established to the satisfaction of the 
Commissioner that United States persons hold directly (or indirectly 
applying section 958(a)(2) and (3) and section 318(a)(4)) less than 50 
percent of the total combined voting power of all classes of stock 
entitled to vote and less than 50 percent of the total value of the 
stock of such corporation. For the consequences of a stapled foreign 
corporation becoming or ceasing to be foreign owned, therefore 
converting its

[[Page 43759]]

status as either a foreign or domestic corporation within the meaning 
of this paragraph (a)(2), see paragraph (c) of this section.
    (b) Definition of a stapled foreign corporation--(1) General rule. 
A foreign corporation is a stapled foreign corporation if such foreign 
corporation and a domestic corporation are stapled entities. A foreign 
corporation and a domestic corporation are stapled entities if more 
than 50 percent of the aggregate value of each corporation's beneficial 
ownership consists of interests that are stapled. In the case of 
corporations with more than one class of stock, it is not necessary for 
a class of stock representing more than 50 percent of the beneficial 
ownership of the foreign corporation to be stapled to a class of stock 
representing more than 50 percent of the beneficial ownership of the 
domestic corporation, provided that more than 50 percent of the 
aggregate value of each corporation's beneficial ownership (taking into 
account all classes of stock) are in fact stapled. Interests are 
stapled if a transferor of one or more interests in one entity is 
required, by form of ownership, restrictions on transfer, or other 
terms or conditions, to transfer interests in the other entity. The 
determination of whether interests are stapled for this purpose is 
based on the relevant facts and circumstances, including, but not 
limited to, the corporations' by-laws, articles of incorporation or 
association, and stock certificates, shareholder agreements, agreements 
between the corporations, and voting trusts with respect to the 
corporations. For the consequences of a foreign corporation becoming or 
ceasing to be a stapled foreign corporation (e.g., a corporation that 
is no longer foreign owned) under this paragraph (b)(1), see paragraph 
(c) of this section.
    (2) Related party ownership rule. For purposes of determining 
whether a foreign corporation is a stapled foreign corporation, the 
Commissioner may, at his discretion, treat interests that otherwise 
would be stapled interests as not being stapled if the same person or 
related persons (within the meaning of section 267(b) or 707(b)) hold 
stapled interests constituting more than 50 percent of the beneficial 
ownership of both corporations, and a principal purpose of the stapling 
of those interests is the avoidance of U.S. income tax. A stapling of 
interests may have a principal purpose of tax avoidance even though the 
tax avoidance purpose is outweighed by other purposes when taken 
together.
    (3) Example. The principles of paragraph (b)(1) of this section are 
illustrated by the following example:

    Example. USCo, a domestic corporation, and FCo, a foreign 
corporation, are publicly traded companies, each having two classes 
of stock outstanding. USCo's class A shares, which constitute 75% of 
the value of all beneficial ownership in USCo, are stapled to FCo's 
class B shares, which constitute 25% of the value of all beneficial 
ownership in F Co. USCo's class B shares, which constitute 25% of 
the value of all beneficial ownership in USCo, are stapled to FCo 
class A shares, which constitute 75% of the value of all beneficial 
ownership in FCo. Because more than 50% of the aggregate value of 
the stock of each corporation is stapled to the stock of the other 
corporation, USCo and FCo are stapled entities within the meaning of 
section 269B(c)(2).

    (c) Changes in domestic or foreign status. The deemed conversion of 
a foreign corporation to a domestic corporation under section 269B is 
treated as a reorganization under section 368(a)(1)(F). Similarly, the 
deemed conversion of a corporation that is treated as a domestic 
corporation under section 269B to a foreign corporation is treated as a 
reorganization under section 368(a)(1)(F). For the consequences of a 
deemed conversion, including the closing of a corporation's taxable 
year, see Sec. Sec.  1.367(a)-1T(e), (f) and 1.367(b)-2(f).
    (d) Includible corporation--(1) Except as provided in paragraph 
(d)(2) of this section, a stapled foreign corporation treated as a 
domestic corporation under section 269B nonetheless is treated as a 
foreign corporation in determining whether it is an includible 
corporation within the meaning of section 1504(b). Thus, for example, a 
stapled foreign corporation is not eligible to join in the filing of a 
consolidated return under section 1501, and a dividend paid by such 
corporation is not a qualifying dividend under section 243(b), unless a 
valid section 1504(d) election is made with respect to such 
corporation.
    (2) A stapled foreign corporation is treated as a domestic 
corporation in determining whether it is an includible corporation 
under section 1504(b) for purposes of applying Sec. Sec.  1.904(i)-1 
and 1.861-11T(d)(6).
    (e) U.S. treaties--(1) A stapled foreign corporation that is 
treated as a domestic corporation under section 269B may not claim an 
exemption from U.S. income tax or a reduction in U.S. tax rates by 
reason of any treaty entered into by the United States.
    (2) The principles of this paragraph (e) are illustrated by the 
following example:

    Example. FCo, a Country X corporation, is a stapled foreign 
corporation that is treated as a domestic corporation under section 
269B. FCo qualifies as a resident of Country X pursuant to the 
income tax treaty between the United States and Country X. Under 
such treaty, the United States is permitted to tax business profits 
of a Country X resident only to the extent that the business profits 
are attributable to a permanent establishment of the Country X 
resident in the United States. While FCo earns income from sources 
within and without the United States, it does not have a permanent 
establishment in the United States within the meaning of the 
relevant treaty. Under paragraph (e)(1) of this section, however, 
FCo is subject to U.S. Federal income tax on its income as a 
domestic corporation without regard to the provisions of the U.S.-
Country X treaty and therefore without regard to the fact that FCo 
has no permanent establishment in the United States.

    (f) Tax assessment and collection procedures--(1) In general. (i) 
Any income tax imposed on a stapled foreign corporation by reason of 
its treatment as a domestic corporation under section 269B (whether 
such income tax is shown on the stapled foreign corporation's U.S. 
Federal income tax return or determined as a deficiency in income tax) 
shall be assessed as the income tax liability of such stapled foreign 
corporation.
    (ii) Any income tax assessed as a liability of a stapled foreign 
corporation under paragraph (f)(1)(i) of this section shall be 
considered as having been properly assessed as an income tax liability 
of the stapled domestic corporation (as defined in paragraph (f)(4)(i) 
of this section) and all 10-percent shareholders of the stapled foreign 
corporation (as defined in paragraph (f)(4)(ii) of this section). The 
date of such deemed assessment shall be the date the income tax 
liability of the stapled foreign corporation was properly assessed. The 
Commissioner may collect such income tax from the stapled domestic 
corporation under the circumstances set forth in paragraph (f)(2) of 
this section and may collect such income tax from any 10-percent 
shareholders of the stapled foreign corporation under the circumstances 
set forth in paragraph (f)(3) of this section.
    (2) Collection from domestic stapled corporation. If the stapled 
foreign corporation does not pay its income tax liability that was 
properly assessed, the unpaid balance of such income tax or any portion 
thereof may be collected from the stapled domestic corporation, 
provided that the following conditions are satisfied--
    (i) The Commissioner has issued a notice and demand for payment of 
such income tax to the stapled foreign corporation in accordance with 
Sec.  301.6303-1 of this Chapter;

[[Page 43760]]

    (ii) The stapled foreign corporation has failed to pay the income 
tax by the date specified in such notice and demand;
    (iii) The Commissioner has issued a notice and demand for payment 
of the unpaid portion of such income tax to the stapled domestic 
corporation in accordance with Sec.  301.6303-1 of this Chapter.
    (3) Collection from 10-percent shareholders of the stapled foreign 
corporation. The unpaid balance of the stapled foreign corporation's 
income tax liability may be collected from a 10-percent shareholder of 
the stapled foreign corporation, limited to each such shareholder's 
income tax liability as determined under paragraph (f)(4)(iv) of this 
section, provided the following conditions are satisfied--
    (i) The Commissioner has issued a notice and demand to the stapled 
domestic corporation for the unpaid portion of the stapled foreign 
corporation's income tax liability, as provided in paragraph 
(f)(2)(iii) of this section;
    (ii) The stapled domestic corporation has failed to pay the income 
tax by the date specified in such notice and demand;
    (iii) The Commissioner has issued a notice and demand for payment 
of the unpaid portion of such income tax to such 10-percent shareholder 
of the stapled foreign corporation in accordance with Sec.  301.6303-1 
of this Chapter.
    (4) Special rules and definitions. For purposes of this paragraph 
(f), the following rules and definitions apply:
    (i) Stapled domestic corporation. A domestic corporation is a 
stapled domestic corporation with respect to a stapled foreign 
corporation if such domestic corporation and the stapled foreign 
corporation are stapled entities as described in paragraph (b)(1) of 
this section.
    (ii) 10-percent shareholder. A 10-percent shareholder of a stapled 
foreign corporation is any person that owned directly 10 percent or 
more of the total value or total combined voting power of all classes 
of stock in the stapled foreign corporation for any day of the stapled 
foreign corporation's taxable year with respect to which the income tax 
liability relates.
    (iii) 10-percent shareholder in the case of indirect ownership of 
stapled foreign corporation stock. [Reserved].
    (iv) Determination of a 10-percent shareholder's income tax 
liability. The income tax liability of a 10-percent shareholder of a 
stapled foreign corporation, for the income tax of the stapled foreign 
corporation under section 269B and this section, is determined by 
assigning an equal portion of the total income tax liability of the 
stapled foreign corporation for the taxable year to each day in such 
corporation's taxable year, and then dividing that portion ratably 
among the shares outstanding for that day on the basis of the relative 
values of such shares. The liability of any 10-percent shareholder for 
this purpose is the sum of the income tax liability allocated to the 
shares held by such shareholder for each day in the taxable year.
    (v) Income tax. The term income tax means any income tax liability 
imposed on a domestic corporation under title 26 of the United States 
Code, including additions to tax, additional amounts, penalties, and 
interest related to such income tax liability.
    (g) Effective dates--(1) Except as provided in this paragraph (g), 
the provisions of this section are applicable for taxable years that 
begin after July 29, 2005.
    (2) Paragraphs (d)(1) and (f) of this section (except as applied to 
the collection of tax from any 10-percent shareholder of a stapled 
foreign corporation that is a foreign person) are applicable beginning 
on--
    (i) July 18, 1984, for any foreign corporation that became stapled 
to a domestic corporation after June 30, 1983; and
    (ii) January 1, 1987, for any foreign corporation that was stapled 
to a domestic corporation as of June 30, 1983.
    (3) Paragraph (d)(2) of this section is applicable for taxable 
years beginning after July 22, 2003, except that in the case of a 
foreign corporation that becomes stapled to a domestic corporation on 
or after July 22, 2003, paragraph (d)(2) of this section applies for 
taxable years ending on or after July 22, 2003.
    (4) Paragraph (e) of this section is applicable beginning on July 
18, 1984, except as provided in paragraph (g)(5) of this section.
    (5) In the case of a foreign corporation that was stapled to a 
domestic corporation as of June 30, 1983, which was entitled to claim 
benefits under an income tax treaty as of that date, and which remains 
eligible for such treaty benefits, paragraph (e) of this section will 
not apply to such foreign corporation and for all purposes of the 
Internal Revenue Code such corporation will continue to be treated as a 
foreign entity. The prior sentence will continue to apply even if such 
treaty is subsequently modified by protocol, or superseded by a new 
treaty, so long as the stapled foreign corporation continues to be 
eligible to claim such treaty benefits. If the treaty benefits to which 
the stapled foreign corporation was entitled as of June 30, 1983, are 
terminated, then a deemed conversion of the foreign corporation to a 
domestic corporation shall occur pursuant to paragraph (c) of this 
section as of the date of such termination.

0
Par. 3. In Sec.  1.367(b)-2, paragraph (g) is revised to read as 
follows:


Sec.  1.367(b)-2  Definitions and special rules.

* * * * *
    (g) Stapled stock under section 269B. For rules addressing the 
deemed conversion of a foreign corporation to a domestic corporation 
under section 269B, see Sec.  1.269B-1(c).
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

0
Par 4. The authority citation for part 301 continues to read, in part, 
as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 301.269B-1 also issued under 26 U.S.C. 269B(b).


0
Par. 5. Section 301.269B-1 is added to read as follows:


Sec.  301.269B-1  Stapled foreign corporations.

    In accordance with section 269B(a)(1), a stapled foreign 
corporation is subject to the same taxes that apply to a domestic 
corporation under Title 26 of the Internal Revenue Code. For provisions 
concerning taxes other than income for which the stapled foreign 
corporation is liable, apply the same rules as set forth in Sec.  
1.269B-1(a) through (f)(1)(i), and (g) of this Chapter, except that 
references to income tax shall be replaced with the term tax. In 
addition, for purposes of collecting those taxes solely from the 
stapled foreign corporation, the term tax means any tax liability 
imposed on a domestic corporation under Title 26 of the United States 
Code, including additions to tax, additional amounts, penalties, and 
interest related to that tax liability.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.

    Approved: July 14, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 05-15059 Filed 7-28-05; 8:45 am]
BILLING CODE 4830-01-P