Corporate EXIT Fairness Act

To amend the Internal Revenue Code of 1986 to discourage corporate inversions and to impose tax on unrepatriated earnings and unrecognized gains in connection with corporate expatriations. 1. Short title This Act may be cited as the Corporate EXpatriates and Inverters Tax Fairness Act Corporate EXIT Fairness Act 2. Rules to discourage corporate inversions and impose tax on unrepatriated earnings and unrecognized gains in connection with corporate expatriations (a) Rules relating to corporate inversions and corporate expatriations completed after January 4, 2017 Subchapter C of chapter 80 7874A. Rules relating to corporate inversions and corporate expatriations (a) Unrepatriated earnings and unrecognized gains in connection with corporate expatriation (1) In general In the case of a corporate expatriation— (A) the subpart F income of any applicable controlled foreign corporation for its last taxable year ending before the acquisition date shall be increased by the accumulated deferred foreign income of such corporation, and (B) any gain position stock of any applicable controlled foreign corporation which is held by an expatriated entity on the acquisition date shall be treated as sold on such date for its fair market value. (2) Rules related to recognition of gain (A) Application to dispositions during 5 years before acquisition date In the case of any disposition of gain position stock of any applicable controlled foreign corporation by an expatriated entity at any time during the 5-year period ending on the acquisition date with respect to a corporate expatriation, such disposition shall be treated as a sale of such stock for its fair market value and the period of limitation on assessment and collection of any tax with respect to such disposition under section 6501 or 6502 shall commence not earlier than the acquisition date. (B) Gain position stock For purposes of this subsection, the term gain position stock (C) Gain taken into account; proper adjustment Notwithstanding any other provision of this title, in the case of any sale under paragraph (1)(B) or (2)(A), any gain arising from such sale shall be taken into account for the taxable year of the sale. In the case of any sale under paragraph (1)(B), proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain taken into account under the preceding sentence. (b) Foreign parent treated as domestic corporation Notwithstanding section 7701(a)(4)— (1) Application to corporate inversions In the case of a corporate inversion, the foreign corporation making the acquisition described in subsection (c)(1) shall be treated for purposes of this title as a domestic corporation. (2) Elective application to corporate expatriations If the common parent of the expanded affiliated group which includes the foreign corporation making the acquisition in a corporate expatriation elects the application of this paragraph and enters into an agreement with the Secretary providing the Secretary such assurances as the Secretary may require that the application of paragraph (1) will be administrable and enforceable with respect to such corporation— (A) such foreign corporation shall be treated for purposes of this title as a domestic corporation, and (B) subsection (a) shall not apply with respect to such corporate expatriation. (c) Corporate inversion; corporate expatriation For purposes of this section— (1) Corporate inversion The term corporate inversion (A) such acquisition is completed after January 4, 2017, (B) after the acquisition the expanded affiliated group which includes the foreign corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign corporation is created or organized, when compared to the total business activities of such expanded affiliated group, and (C) after the acquisition, either— (i) more than 50 percent of the stock (by vote or value) of the foreign corporation is held— (I) 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 (II) in the case of an acquisition with respect to a partnership, by former partners of the partnership by reason of holding a capital or profits interest in the partnership, or (ii) the management and control of the expanded affiliated group which includes the foreign corporation occurs, directly or indirectly, primarily within the United States, and such expanded affiliated group has significant domestic business activities. (2) Corporate expatriation The term corporate expatriation (3) Determinations with respect to management and control and business activities (A) Management and control For purposes of paragraph (1)(C)(ii)— (i) In general The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of an expanded affiliated group is to be treated as occurring, directly or indirectly, primarily within the United States. (ii) Executive officers and senior management Such regulations shall provide that the management and control of an expanded affiliated group shall be treated as occurring, directly or indirectly, primarily within the United States if substantially all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the expanded affiliated group are based or primarily located within the United States. Individuals who in fact exercise such day-to-day responsibilities shall be treated as executive officers and senior management regardless of their title. (B) Substantial business activities For purposes of paragraph (1)(B), the term substantial business activities (C) Significant domestic business activities For purposes of paragraph (1)(C)(ii), an expanded affiliated group has significant domestic business activities if at least 25 percent of— (i) the employees of the group are based in the United States, (ii) the employee compensation incurred by the group is incurred with respect to employees based in the United States, (iii) the assets of the group are located in the United States, or (iv) the income of the group is derived in the United States, determined in the same manner as such determinations are made for purposes of determining substantial business activities under regulations referred to in subparagraph (B) as in effect on January 4, 2017, but applied by treating all references in such regulations to foreign country relevant foreign country the United States (4) Certain stock disregarded There shall not be taken into account in determining ownership under paragraph (1)(C)(i)— (A) stock held by members of the expanded affiliated group which includes the foreign corporation, or (B) stock of such foreign corporation which is sold in a public offering related to the acquisition described in the matter preceding subparagraph (A) of paragraph (1). (5) Plan deemed in certain cases If a foreign corporation completes an acquisition which would be described in paragraph (1) or (2) if such acquisition were pursuant to a plan and such acquisition is completed— (A) in the case of an acquisition which would be so described in paragraph (1), during the 4-year period beginning on the date which is 2 years before the ownership requirements of paragraph (1)(C)(i) are met, or (B) in the case of an acquisition which would be so described in paragraph (2), during the 4-year period ending on the acquisition date, such acquisition shall be treated as pursuant to a plan. (6) Certain transfers disregarded The transfer of properties or liabilities (including by contribution or distribution) shall be disregarded if such transfers are part of a plan a principal purpose of which is to avoid the purposes of this section. (7) Special rule for related partnerships For purposes of applying paragraph (1)(C)(i) to the acquisition of a trade or business of a partnership, except as provided in regulations, all partnerships which are under common control (within the meaning of section 482) shall be treated as 1 partnership. (8) Regulations The Secretary shall prescribe such regulations as may be appropriate to determine whether any transaction or series of transactions is a corporate inversion or corporate expatriation, including regulations— (A) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and (B) to treat stock as not stock. (d) Other definitions For purposes of this section— (1) Accumulated deferred foreign income (A) In general The term accumulated deferred foreign income (i) the undistributed earnings of the controlled foreign corporation, over (ii) the undistributed U.S. earnings of such controlled foreign corporation. (B) Undistributed earnings The term undistributed earnings (i) as of the close of the taxable year described in subparagraph (A), (ii) without diminution by reason of distributions made during such taxable year, and (iii) without regard to this paragraph. For purposes of this chapter, any determination with respect to the treatment of distributions described in clause (ii) shall be made after the application of this paragraph to the earnings and profits described in the matter preceding clause (i). (C) Undistributed U.S. earnings The term undistributed U.S. earnings post-1986 undistributed U.S. earnings (i) as of the close of the taxable year described in subparagraph (A) of this paragraph, and (ii) without regard to post-1986 (2) Applicable controlled foreign corporation The term applicable controlled foreign corporation (3) Expatriated entity The term expatriated entity (A) the corporation or partnership referred to in the matter preceding subparagraph (A) of subsection (c)(1) (including with respect to the application of such subsection pursuant to subsection (c)(2)), and (B) any United States person who is related (within the meaning of section 267(b) or 707(b)(1)) to a corporation or partnership described in subparagraph (A). (4) Acquisition date The term acquisition date (5) Expanded affiliated group The term expanded affiliated group more than 50 percent at least 80 percent (e) Special rules (1) Credits not allowed against tax on unrepatriated earnings and unrecognized gains In the case of any expatriated entity and any United States shareholder of an applicable controlled foreign corporation, credits (other than the credit allowed by section 901) shall be allowed against the tax imposed by chapter 1 on such entity or corporation for any taxable year with respect to which any amount is included in income under subsection (a) only to the extent such tax exceeds the product of— (A) the amount so included in income, and (B) the highest rate of tax specified in section 11(b)(1). For purposes of determining the credit allowed by section 901, such income shall be treated as from sources within the United States. (2) Coordination with section 172 and minimum tax Rules similar to the rules of paragraphs (3) and (4) of section 860E(a) shall apply for purposes of subsection (a). (f) Special rule for treaties Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section. (g) Regulations The Secretary shall provide such regulations as are necessary to carry out this section, including regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including the avoidance of such purposes through— (1) the use of related persons, pass-through or other noncorporate entities, or other intermediaries, or (2) transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons. . (b) Modifications to rules relating to corporate inversions completed on or before January 4, 2017 (1) In general Subsection (b) of section 7874 (b) Inverted corporations treated as domestic corporations (1) In general Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if— (A) such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting 80 percent 60 percent (B) such corporation is an inverted domestic corporation. (2) Inverted domestic corporation For purposes of this subsection, a foreign corporation shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)— (A) the entity completes after May 8, 2014, and on or before January 4, 2017, the direct or indirect acquisition of— (i) substantially all of the assets of a domestic corporation or domestic partnership, (ii) substantially all of the trade or business assets of a domestic corporation or domestic partnership, or (iii) substantially all of the United States trade or business assets of a foreign partnership, and (B) after the acquisition, either— (i) more than 50 percent of the stock (by vote or value) of the entity is held— (I) 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 (II) in the case of an acquisition with respect to a partnership, by former partners of the partnership by reason of holding a capital or profits interest in the partnership, or (ii) the management and control of the expanded affiliated group which includes the entity occurs, directly or indirectly, primarily within the United States, and such expanded affiliated group has significant domestic business activities. (3) Exception for corporations with substantial business activities in foreign country of organization A foreign corporation described in paragraph (2) shall not be treated as an inverted domestic corporation if after the acquisition the expanded affiliated group which includes the entity has 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. For purposes of subsection (a)(2)(B)(iii) and the preceding sentence, the term substantial business activities (4) Management and control For purposes of paragraph (2)(B)(ii)— (A) In general The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of an expanded affiliated group is to be treated as occurring, directly or indirectly, primarily within the United States. The regulations prescribed under the preceding sentence shall apply to periods after May 8, 2014. (B) Executive officers and senior management Such regulations shall provide that the management and control of an expanded affiliated group shall be treated as occurring, directly or indirectly, primarily within the United States if substantially all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the expanded affiliated group are based or primarily located within the United States. Individuals who in fact exercise such day-to-day responsibilities shall be treated as executive officers and senior management regardless of their title. (5) Significant domestic business activities For purposes of paragraph (2)(B)(ii), an expanded affiliated group has significant domestic business activities if at least 25 percent of— (A) the employees of the group are based in the United States, (B) the employee compensation incurred by the group is incurred with respect to employees based in the United States, (C) the assets of the group are located in the United States, or (D) the income of the group is derived in the United States, determined in the same manner as such determinations are made for purposes of determining substantial business activities under regulations referred to in paragraph (3) as in effect on May 8, 2014, but applied by treating all references in such regulations to foreign country relevant foreign country the United States . (2) Conforming amendments (A) Clause (i) of section 7874(a)(2)(B) of such Code is amended by striking after March 4, 2003, after March 4, 2003, and before May 9, 2014, (B) Subsection (c) of section 7874 of such Code is amended— (i) in paragraph (2)— (I) by striking subsection (a)(2)(B)(ii) subsections (a)(2)(B)(ii) and (b)(2)(B)(i) (II) by inserting or (b)(2)(A) (a)(2)(B)(i) (ii) in paragraph (3), by inserting or (b)(2)(B)(i), as the case may be, (a)(2)(B)(ii) (iii) in paragraph (5), by striking subsection (a)(2)(B)(ii) subsections (a)(2)(B)(ii) and (b)(2)(B)(i) (iv) in paragraph (6), by inserting or inverted domestic corporation, as the case may be, surrogate foreign corporation (c) Technical and conforming amendments related to stock compensation of insiders in expatriated corporations (1) Section 4985(a)(1) of such Code is amended by striking section 1(h)(1)(C) section 1(h)(1)(D) (2) Section 4985(c) of such Code is amended by inserting or section 7874A(c)(1) (without regard to subparagraph (C) thereof) section 7874(a)(2)(B)(i) (3) Section 4985(e)(2)(A) of such Code is amended by inserting or section 7874A(d)(3) section 7874(a)(2) (d) Clerical amendments (1) The heading for section 7874 of such Code is amended by striking expatriated entities and their foreign parents corporate inversions completed on or before January 4, 2017 (2) The table of sections for subchapter C of chapter 80 of such Code is amended by striking the item relating to section 7874 and inserting the following new items: Sec. 7874. Rules relating to corporate inversions completed on or before January 4, 2017. Sec. 7874A. Rules relating to corporate inversions and corporate expatriations. . (e) Effective date (1) In general Except as provided in paragraph (2), the amendments made by this section shall apply taxable years ending after January 4, 2017. (2) Modifications to rules relating to corporate inversions completed on or before January 4, 2017 The amendments made by subsection (b) shall apply to taxable years ending after May 8, 2014.

Summary: Corporate EXpatriates and Inverters Tax Fairness Act or the Corporate EXIT Fairness Act This bill amends the Internal Revenue Code to set forth rules governing corporate inversions (i.e., the practice of relocating a domestic corporation's legal domicile to a lower-tax nation while retaining its business activities in the higher-tax country of origin) and corporate expatriations. Specifically, the bill requires payment of tax on the deferred overseas profits of U.S. multinational corporations or partnerships before they reincorporate or organize in a foreign country. Additionally, any stock of a controlled foreign corporation in connection with a corporate expatriation would be treated as sold for its fair market value as of the date of expatriation and be subject to U.S. taxation. The bill expands the definitions of "corporate inversion" and "corporate expatriation" and revises rules relating to the taxation of inverted corporations. A foreign corporation that acquires the assets of a U.S. corporation or partnership after January 4, 2017, shall be treated as an inverted corporation and thus subject to U.S. taxation if, after such acquisition: (1) the expanded affiliated group which includes the foreign corporation does not have substantial business activities in the foreign country in which the corporation is created or organized, when compared to the total business activities of such expanded affiliated group; and (2) more than 50% of the foreign corporation is held by former shareholders or partners of the domestic corporation or partnership, or the management or control of the expanded affiliated group occurs primarily within the United States, and such expanded affiliated group has significant domestic business activities.