In the most recent FAC 2005-65, a FAR rule was issued as final related to so-called “inverted domestic corporations.” My first thought was perhaps this upside-down companies were like home owners that are upside-down in their mortgage. This made me think of the financial capability reviews I would do on contractors back in my DCAA days. Maybe there would be more financial capability assessment of all companies? My next thought was about an inverted domestic company being upside-down organizationally in a microcosm. Normally a company is more “chiefs than braves” – maybe this was the other way around. Perhaps the government is concerned about their not being enough management power to actually slow down the process (it’s ok to laugh at that). Finally, I decided I just didn’t know enough about what this term meant and decided to see what I can find.
First, I found a good “definition” through an online Answer forum:
It’s a foreign incorporated entity which is treated as an inverted domestic corporation under 6 U.S.C. 395(b), meaning that it’s a corporation that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country, that meets the criteria specified in 6 U.S.C. 395(b).
Ugh – this seemed like research already. I guess I should check out 6 USC 395(b).
(b) Inverted domestic corporation For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions) –
(1) the entity completes after November 25, 2002, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership;
(2) after the acquisition at least 80 percent of the stock (by vote or value) of the entity is held – (A) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; or (B) in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership; and
(3) the expanded affiliated group which after the acquisition includes the entity does not have substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group.
I get it! (it’s ok to laugh at that too). An inverted domestic corporation was organized in the US and relocated offshore afterward to shelter themselves from corporate taxation. Or, perhaps they are a subsidiary of a foreign company… this second part makes me take pause.
Once upon a time I worked for a US subsidiary of a foreign company. Scrolling through the Code, I find the company is ok. A foreign company establishing a domestic office is not covered under this particular section.
The bottom-line is that the US company has to exist first and then become a foreign interest through some plan to make it a foreign entity. I guess in the end it is probably more complex than this, but that is why I work with lawyers.