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IRS Finalizes Regulations on Substantial Business Activities

June 08, 2015

The Treasury Department and the IRS issued final regulations on June 3d regarding the determination of when an EAG will be considered to have substantial business activities in a foreign country.

The Treasury Department and the IRS issued final regulations (T.D. 9720) on June 3d regarding the determination of when an expanded affiliated group (EAG) will be considered to have substantial business activities in a foreign country. The “Substantial Business Activities” test is applied when determining whether a foreign corporation is treated as a “surrogate foreign corporation” under the inversion rules. The regulations finalize temporary rules which were originally issued in 2012 and were the subject of some debate. The final regulations contain some minor changes, but retain the bright-line test for determining substantial business activities.

The IRS finalized the regulations with a few clarifications in response to comments. The final regulations reflect changes to the rules regarding how to determine:

  1. Whether individuals are group employees;
  2. When group employees compensation is incurred;
  3. The location of mobile assets; and
  4. Group income

The final regulations apply to acquisitions completed on or after June 3, 2015. You can read the full list of final regulations here. For questions or more information please contact Fred Corso, CPA or any member of our Global Tax Services Group.

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