Substantial Business Activities, 34785-34788 [2012-14226]
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Federal Register / Vol. 77, No. 113 / Tuesday, June 12, 2012 / Rules and Regulations
Final rule; technical
amendment.
ACTION:
The ‘‘FAA Modernization and
Reform Act of 2012,’’ enacted on
February 14, 2012, in Section 305 of the
Act, removed the line check
performance evaluation requirements
for pilots over 60 years of age that
applied to air carriers engaged in part
121 operations. This technical
amendment conforms to the FAA’s
regulations as a result of the Act.
DATES: Effective June 12, 2012.
FOR FURTHER INFORMATION CONTACT: For
technical questions concerning this rule
contact Nancy Lauck Claussen, Air
Transportation Division, AFS–200,
Federal Aviation Administration, 800
Independence Avenue SW.,
Washington, DC 20591; telephone (202)
267–8166, email
nancy.l.claussen@faa.gov.
SUMMARY:
SUPPLEMENTARY INFORMATION:
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Background
In 2007, Congress enacted the ‘‘Fair
Treatment for Experienced Pilots Act’’
which became effective December 13,
2007. This legislation raised the upper
age limit for pilots in part 121 from age
60 to age 65. It also required that air
carriers engaged in part 121 operations
evaluate the performance of 60 years old
pilots, through a line check, every 6
months.
On February 14, 2012, Congress
enacted the ‘‘FAA Modernization and
Reform Act of 2012’’ (the ‘‘Act’’).
Section 305 of the Act removed the line
check evaluation performance
requirements contained in the Fair
Treatment for Experienced Pilots Act.
Upon enactment of the Act, § 121.440
(d) through (f) of the Code of Federal
Regulations (CFR) ceased to be effective.
Section 121.440(d) requires that no
certificate holder may use the services
of any person as a pilot unless the
certificate holder evaluates every 6
months the performance, through a line
check, of each pilot who has attained 60
years of age.
Section 121.440(e) requires that no
pilot who has attained 60 years of age
may serve as a pilot in operations, under
this part, unless the certificate holder
has evaluated the pilot’s performance
every 6 months, through a line check.
Section 121.440(f) establishes
limitations regarding the requirements
in (d) and (e) that apply to the line
check requirements for pilots over age
60.
The requirement that the performance
of each pilot of the air carrier who has
attained 60 years of age be evaluated,
through a line check, every 6 months, is
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more restrictive than line check
requirements that apply to other pilots
in part 121 operations. These provisions
only require that pilots-in command be
evaluated, through a line check, every
12 months. With Section 305 of the Act,
it was Congress’ objective to impact
rules governing the age limitation
requirements of pilots over age 60
engaged in operations under part 121.
This technical amendment aligns FAA
regulations to statutory requirements
which will establish the same line check
requirements for all pilots in part 121
operations, regardless of age.
44903–44904, 44912, 45101–45105, 46105,
46301.
Discussion of Dates
Internal Revenue Service
The Act was effective on February 14,
2012. Pending publication of this rule,
the FAA has not enforced the line check
requirements for pilots who have
attained 60 years of age. This technical
amendment conforms to the FAA’s
regulations as a result of the Act and is
effective upon publication in the
Federal Register.
Technical Amendment
A legislative mandate of this nature
makes it unnecessary to provide an
opportunity for notice and comment.
Further, we find that good cause exists
under 5 U.S.C. 553(d)(3) to make the
amendment effective upon publication
to minimize any possible confusion. If
we do not correct the language in the
CFR, we are likely to receive numerous
petitions for exemption, because the
published language is not consistent
with the statute. Since the FAA would
not have safety or policy reasons to
deny the exemptions, we have included
these amendments in this final rule to
remove the requirements that each pilot
of the air carrier who has attained 60
years of age be evaluated, through a line
check, every 6 months.
List of Subjects in 14 CFR Part 121
Air carriers, Aircraft, Airmen, Alcohol
abuse, Aviation safety, Charter flights,
Drug abuse, Drug testing, Reporting and
recordkeeping requirements, Safety.
The Amendment
In consideration of the foregoing, the
Federal Aviation Administration
amends Chapter I of Title 14 Code of
Federal Regulations as follows:
PART 121—OPERATING
REQUIREMENTS: DOMESTIC, FLAG,
AND SUPPLEMENTAL OPERATIONS
1. The authority citation for part 121
continues to read as follows:
■
Authority: 49 U.S.C. 106(g), 40113, 40119,
41706, 44101, 44701–44702, 44705, 44709–
44711, 44713, 44716–44717, 44722, 44901,
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§ 121.440
[Amended]
2. Amend § 121.440 by removing
paragraphs (d) through (f).
■
Issued in Washington, DC, on June 5, 2012.
Lirio Liu,
Acting Director, Office of Rulemaking.
[FR Doc. 2012–14280 Filed 6–11–12; 8:45 am]
BILLING CODE 4910–13–P
DEPARTMENT OF THE TREASURY
26 CFR Part 1
[TD 9592]
RIN 1545–BK86
Substantial Business Activities
Internal Revenue Service (IRS),
Treasury.
ACTION: Temporary Regulations.
AGENCY:
This document contains
temporary regulations regarding
whether a foreign corporation has
substantial business activities in a
foreign country. These regulations affect
certain domestic corporations and
partnerships (and certain parties related
thereto), and foreign corporations that
acquire substantially all of the
properties of such domestic
corporations or partnerships. The text of
these temporary regulations serves as
the text of the proposed regulations set
forth in the notice of proposed
rulemaking on this subject also
published in this issue of the Federal
Register.
SUMMARY:
Effective Date: These regulations
are effective on June 12, 2012.
Applicability Date: For date of
applicability, see § 1.7874–3T(f).
FOR FURTHER INFORMATION CONTACT:
Mary W. Lyons, (202) 622–3860 and
David A. Levine, (202) 622–3860 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
DATES:
Background
On June 6, 2006, temporary
regulations under section 7874 (TD
9265, 2006–2 CB 1) were published in
the Federal Register (71 FR 32437)
concerning the treatment of a foreign
corporation as a surrogate foreign
corporation (2006 temporary
regulations). A notice of proposed
rulemaking (REG–112994–06) crossreferencing the 2006 temporary
regulations was published in the same
issue of the Federal Register (71 FR
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32495, 2006–2 CB 47). On July 28, 2006,
Notice 2006–70 (2006–2 CB 252) was
published, announcing a modification
to the effective date contained in the
2006 temporary regulations. See
§ 601.601(d)(2)(ii)(b). On June 12, 2009,
the 2006 temporary regulations and the
related notice of proposed rulemaking
were withdrawn and replaced with new
temporary regulations (2009 temporary
regulations), which generally applied to
acquisitions completed on or after June
9, 2009. TD 9453 (74 FR 27920, 2009–
2 CB 114). A notice of proposed
rulemaking (REG–112994–06) crossreferencing the 2009 temporary
regulations was published in the same
issue of the Federal Register (74 FR
27947, 2009–2 CB 144). No public
hearing was requested or held; however,
comments were received. All comments
are available at www.regulations.gov or
upon request. After consideration of the
comments received regarding whether a
foreign corporation has substantial
business activities in a foreign country,
the Internal Revenue Service (IRS) and
the Department of the Treasury
(Treasury Department) have decided to
issue new temporary regulations under
§ 1.7874–3T (2012 temporary
regulations) and a new notice of
proposed rulemaking that provide
guidance regarding this determination.
The other portions of the 2009
temporary regulations are finalized in a
separate Treasury Decision published
elsewhere in this issue of the Federal
Register.
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Explanation of Provisions
A. General Approach
A foreign corporation is generally
treated as a surrogate foreign
corporation under section 7874(a)(2)(B)
if pursuant to a plan (or a series of
related transactions): (i) The foreign
corporation completes after March 4,
2003, the direct or indirect acquisition
of substantially all of the properties held
directly or indirectly by a domestic
corporation; (ii) after the acquisition at
least 60 percent of the stock (by vote or
value) of the foreign corporation is held
by former shareholders of the domestic
corporation by reason of holding stock
in the domestic corporation; and (iii)
after the acquisition, the expanded
affiliated group that includes the foreign
corporation does not have substantial
business activities in the foreign country
(relevant 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 the expanded affiliated
group. Similar provisions apply if a
foreign corporation acquires
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substantially all of the properties
constituting a trade or business of a
domestic partnership.
The 2006 temporary regulations
provided that the determination of
whether the expanded affiliated group
has substantial business activities in the
relevant foreign country is based on all
the facts and circumstances. The 2006
temporary regulations also provided a
safe harbor, which generally was
satisfied if at least ten percent of the
employees, assets, and sales of the
expanded affiliated group were in the
relevant foreign country. The 2009
temporary regulations retained the facts
and circumstances general rule
provided in the 2006 temporary
regulations, with certain modifications,
but removed the safe harbor.
The IRS and the Treasury Department
received comments requesting
additional guidance on the level of
business activities necessary for an
expanded affiliated group to have
substantial business activities in the
relevant foreign country. One comment
suggested providing a new safe harbor,
which would require a higher
percentage of business activities in the
relevant foreign country than was
required under the safe harbor included
in the 2006 temporary regulations. The
comment also recommended different
safe harbors depending on the extent of
the expanded affiliated group’s business
activities in the United States.
After consideration of the comments
and the underlying policies of section
7874, the IRS and the Treasury
Department believe the facts and
circumstances test of the 2009
temporary regulations should be
replaced with a bright-line rule
describing the threshold of activities
required for an expanded affiliated
group to have substantial business
activities in the relevant foreign
country. The IRS and the Treasury
Department believe that such a rule will
provide more certainty in applying
section 7874 to particular transactions
than the 2009 temporary regulations and
will improve the administrability of this
provision.
B. Threshold of Business Activities
The 2012 temporary regulations
provide that an expanded affiliated
group will have substantial business
activities in the relevant foreign country
only if at least 25 percent of the group
employees, group assets, and group
income are located or derived in the
relevant foreign country, determined as
follows:
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1. Group Employees
The 2012 temporary regulations set
forth two tests, each of which must be
satisfied, based on employees of
members of the expanded affiliated
group (group employees). The first test
is calculated as the number of group
employees based in the relevant foreign
country divided by the total number of
group employees determined on the
applicable date discussed in section B.4.
of this preamble. The second test is
calculated as employee compensation
with respect to group employees based
in the relevant foreign country divided
by the total employee compensation
with respect to all group employees
determined during the one-year testing
period.
2. Group Assets
The group assets test is calculated as
the value of the group assets located in
the relevant foreign country divided by
the total value of all group assets
determined on the applicable date. The
term group assets generally means
tangible personal property or real
property used or held for use in the
active conduct of a trade or business by
members of the expanded affiliated
group. For this purpose, group assets
include certain property rented by
members of the expanded affiliated
group, with the value of such rented
property being deemed to be eight times
the net annual rent paid or accrued with
respect to such property. The IRS and
the Treasury Department believe that
using an eight-times multiple for this
purpose is administrable and consistent
with the treatment of rented property for
other purposes. See, for example,
Uniform Division of Income for Tax
Purposes Act, §§ 10 and 11. In order to
constitute group assets, such rented
property must satisfy the other
applicable requirements for group
assets, including that the property is
used or held for use in the active
conduct of a trade or business.
3. Group Income
The group income test is calculated as
the group income derived in the
relevant foreign country divided by the
total group income determined during
the one-year testing period. The term
group income means gross income of
members of the expanded affiliated
group from transactions occurring in the
ordinary course of business with
customers that are not related persons.
Group income is considered to be
derived in a foreign country only if the
customer is located in such country.
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4. Applicable Date
Section 7874(a)(2)(B)(iii) provides that
the determination of whether the
expanded affiliated group has
substantial business activities is made
after the acquisition. However, the IRS
and the Treasury Department believe
that when the acquisition occurs other
than at the end of a month the factors
used to determine whether the
substantial business activities test is
satisfied may not be readily
determinable in some cases.
Accordingly, the 2012 temporary
regulations provide that the number of
group employees and the value of group
assets can be measured as of the
applicable date, which is either the date
on which the acquisition is completed
or the last day of the month
immediately preceding the month in
which the acquisition is completed. The
applicable date is also used to
determine the testing period, which is
used in computing group income and
employee compensation. When the
applicable date is the last day of the
month immediately preceding the
month in which the acquisition is
completed, group employees, employee
compensation, group assets, and group
income consist of those items or
amounts of members that comprise the
expanded affiliated group determined at
the close of the acquisition date.
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C. Attribution From a Partnership
The 2009 temporary regulations
provided that for purposes of the
substantial business activities test, a
member of an expanded affiliated group
that holds at least a ten-percent capital
and profits interest in a partnership
takes into account its proportionate
share of all items of the partnership. The
IRS and the Treasury Department
believe that the policies of section 7874
are better advanced if the treatment of
partnerships is made consistent with
that of corporations for purposes of
applying the substantial business
activities test on a group basis.
Accordingly, the 2012 temporary
regulations provide that the items of a
partnership should be taken into
account for this purpose only if one or
more members of the expanded
affiliated group holds, in the aggregate,
more than 50 percent (by value) of the
interests in the partnership. The IRS and
the Treasury Department further believe
that, consistent with the treatment of
corporations, if this ownership
requirement is satisfied, then all the
items of the partnership should be taken
into account for this purpose.
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D. Effective Date
Subject to a transition rule, the 2012
temporary regulations apply to
acquisitions completed on or after June
7, 2012.
Special Analyses
It has been determined that that these
temporary regulations are not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to the 2012 temporary regulations and
because the regulations do not impose a
collection of information on small
entities, the requirements of the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply. Accordingly, a
regulatory flexibility analysis is not
required. Pursuant to section 7805(f) of
the Code, the 2012 temporary
regulations have been submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on their impact on small business.
Requests for Comments
The IRS and the Treasury Department
are considering to what extent partners
of a partnership should be treated as if
they were employees solely for purposes
of the two tests based on group
employees, and specifically request
comments on these issues. For
information on how to submit
comments or request a public hearing,
see the section ‘‘Comments and
Requests for a Public Hearing’’ set forth
in the notice of proposed rulemaking
published elsewhere in this issue of the
Federal Register.
Drafting Information
The principal authors of the 2012
temporary regulations are Mary W.
Lyons and David A. Levine of the Office
of Associate Chief Counsel
(International). However, other
personnel from the IRS and the Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 continues to read in part as
follows:
■
Authority: 26 U.S.C. 7805 * * *
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34787
Section 1.7874–3T is also issued under 26
U.S.C. 7874(c)(6) and (g).* * *
Par. 2. Section 1.7874–3T is added to
read as follows:
■
§ 1.7874–3T Substantial business
activities (temporary).
(a) Scope. This section provides rules
regarding whether a foreign corporation
has substantial business activities in the
relevant foreign country when
compared to the total business activities
of the expanded affiliated group for
purposes of section 7874(a)(2)(B)(iii).
Paragraph (b) of this section sets forth
the threshold of business activities that
constitute substantial business
activities. Paragraph (c) of this section
describes certain items not to be taken
into account as located or derived in the
relevant foreign country. Paragraph (d)
of this section provides definitions and
certain rules of application. Paragraph
(e) of this section provides rules
regarding the treatment of a partnership
in which one or more members of an
expanded affiliated group own an
interest. Paragraph (f) of this section
provides the dates of applicability and
expiration.
(b) Threshold of business activities.
The expanded affiliated group will have
substantial business activities in the
relevant foreign country after the
acquisition when compared to the total
business activities of the expanded
affiliated group only if, subject to
paragraph (c) of this section, each of the
tests described in paragraphs (b)(1)
through (b)(3) of this section is satisfied.
(1) Group employees—(i) Number of
employees. The number of group
employees based in the relevant foreign
country is at least 25 percent of the total
number of group employees on the
applicable date.
(ii) Employee compensation. The
employee compensation incurred with
respect to group employees based in the
relevant foreign country is at least 25
percent of the total employee
compensation incurred with respect to
all group employees during the testing
period.
(2) Group assets. The value of the
group assets located in the relevant
foreign country is at least 25 percent of
the total value of all group assets on the
applicable date.
(3) Group income. The group income
derived in the relevant foreign country
is at least 25 percent of the total group
income during the testing period.
(c) Items not to be considered. The
following items are not taken into
account in the numerator, but are taken
into account in the denominator, for
each of the tests described in paragraphs
(b)(1) through (b)(3) of this section:
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Federal Register / Vol. 77, No. 113 / Tuesday, June 12, 2012 / Rules and Regulations
(1) Any group assets, group
employees, or group income attributable
to business activities that are associated
with properties or liabilities the transfer
of which is disregarded under section
7874(c)(4).
(2) Any group assets or group
employees located in, or group income
derived in, the relevant foreign country
as part of a plan with a principal
purpose of avoiding the purposes of
section 7874.
(3) Any group assets or group
employees located in, or group income
derived in, the relevant foreign country
if such group assets or group employees,
or the business activities to which such
group income is attributable, are
subsequently transferred to another
country in connection with a plan that
existed at the time of the acquisition
described in section 7874(a)(2)(B)(i).
(d) Definitions and application of
rules. The following definitions and
rules apply for purposes of this section:
(1) The term acquisition date means
the date on which the acquisition
described in section 7874(a)(2)(B)(i) is
completed.
(2) The term applicable date means
either of the following dates, applied
consistently for all purposes of this
section:
(i) The acquisition date; or
(ii) The last day of the month
immediately preceding the month in
which the acquisition described in
section 7874(a)(2)(B)(i) is completed.
(3) The term employee compensation
means all amounts incurred by members
of the expanded affiliated group that
directly relate to services performed by
group employees (including, for
example, wages, salaries, deferred
compensation, employee benefits, and
employer payroll taxes). Employee
compensation is determined in U.S.
dollars translated, if necessary, using
the weighted average exchange rate (as
defined in § 1.989(b)-1) for the testing
period.
(4) The term expanded affiliated
group means the affiliated group
defined in section 7874(c)(1)
determined at the close of the
acquisition date. The term member of
the expanded affiliated group means an
entity included in the expanded
affiliated group. A reference to a
member of the expanded affiliated
group includes a predecessor with
respect to such member.
(5) The term group assets means
tangible personal property or real
property used or held for use in the
active conduct of a trade or business by
members of the expanded affiliated
group, provided such property is owned
by members of the expanded affiliated
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group at the close of the acquisition
date. A group asset is considered to be
located in the relevant foreign country
only if the asset was physically present
in such country at the close of the
acquisition date and for more time than
in any other country during the testing
period. All group assets must be valued
consistently and on a gross basis (that is,
not reduced by liabilities) using either
the adjusted tax basis or fair market
value determined in U.S. dollars
translated, if necessary, at the spot rate
determined under the principles of
§ 1.988–1(d)(1), (2), and (4). Tangible
personal property or real property that
is rented by members of the expanded
affiliated group from a person other than
a member of the expanded affiliated
group is also treated as a group asset,
provided such property is used in the
active conduct of a trade or business
and is being rented by members of the
expanded affiliated group at the close of
the acquisition date. For purposes of
this section, a group asset that is rented
is valued at eight times the net annual
rent paid or accrued with respect to the
property by members of the expanded
affiliated group.
(6) The term group employees means
employees of members of the expanded
affiliated group. A group employee is
considered to be based in the relevant
foreign country only if the employee
spent more time providing services in
such country than in any other single
country during the testing period.
(7) The term group income means
gross income of members of the
expanded affiliated group from
transactions occurring in the ordinary
course of business with customers that
are not related persons. Group income is
translated into U.S. dollars, if necessary,
using the weighted average exchange
rate (as defined in § 1.989(b)-1) for the
testing period. Group income is
considered derived in the relevant
foreign country only if it is derived from
a transaction with a customer located in
such country.
(8) The term net annual rent means
the annual rent paid or accrued with
respect to property, less any payments
received or accrued from subleasing
such property (or other similar
arrangement).
(9) The term related person has the
meaning specified in section 954(d)(3),
except that section 954(d)(3) is applied
by substituting ‘‘one or more members
of the expanded affiliated group’’ for ‘‘a
controlled foreign corporation’’ and ‘‘the
controlled foreign corporation’’ each
place they appear.
(10) The term relevant foreign country
means the foreign country in which, or
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under the law of which, the foreign
corporation was created or organized.
(11) The term testing period means
the one-year period ending on the
applicable date.
(e) Treatment of partnerships. For
purposes of this section, if one or more
members of the expanded affiliated
group own, in the aggregate, more than
50 percent (by value) of the interests in
a partnership, such partnership will be
treated as a corporation that is a member
of the expanded affiliated group. Thus,
all items of such a partnership are taken
into account for purposes of this
section. No items of a partnership are
taken into account for purposes of this
section unless the partnership is treated
as a member of the expanded affiliated
group pursuant to this paragraph.
(f) Effective/applicability and
expiration dates. Except as otherwise
provided in this paragraph, this section
shall apply to acquisitions that are
completed on or after June 7, 2012. For
acquisitions completed on or after June
7, 2012 that were either described in a
filing with the Securities and Exchange
Commission on or before June 7, 2012,
or that were subject to a written
agreement that was binding on June 7,
2012, and at all times thereafter,
taxpayers may apply either the rules in
§ 1.7874–2T(g), as contained in 26 CFR
part 1 revised as of April 12, 2012, or
the rules set forth in this section. The
applicability of this section expires on
June 5, 2015.
Steven T. Miller,
Deputy Commissioner for Services and
Enforcement.
Approved: June 4, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury
(Tax Policy).
[FR Doc. 2012–14226 Filed 6–7–12; 4:15 pm]
BILLING CODE 4830–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9591]
RIN 1545–BF47
Surrogate Foreign Corporations
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:
This document contains final
regulations regarding whether a foreign
corporation is treated as a surrogate
foreign corporation. The final
SUMMARY:
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]]>Agencies
[Federal Register Volume 77, Number 113 (Tuesday, June 12, 2012)]
[Rules and Regulations]
[Pages 34785-34788]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-14226]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9592]
RIN 1545-BK86
Substantial Business Activities
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary Regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains temporary regulations regarding whether
a foreign corporation has substantial business activities in a foreign
country. These regulations affect certain domestic corporations and
partnerships (and certain parties related thereto), and foreign
corporations that acquire substantially all of the properties of such
domestic corporations or partnerships. The text of these temporary
regulations serves as the text of the proposed regulations set forth in
the notice of proposed rulemaking on this subject also published in
this issue of the Federal Register.
DATES: Effective Date: These regulations are effective on June 12,
2012.
Applicability Date: For date of applicability, see Sec. 1.7874-
3T(f).
FOR FURTHER INFORMATION CONTACT: Mary W. Lyons, (202) 622-3860 and
David A. Levine, (202) 622-3860 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On June 6, 2006, temporary regulations under section 7874 (TD 9265,
2006-2 CB 1) were published in the Federal Register (71 FR 32437)
concerning the treatment of a foreign corporation as a surrogate
foreign corporation (2006 temporary regulations). A notice of proposed
rulemaking (REG-112994-06) cross-referencing the 2006 temporary
regulations was published in the same issue of the Federal Register (71
FR
[[Page 34786]]
32495, 2006-2 CB 47). On July 28, 2006, Notice 2006-70 (2006-2 CB 252)
was published, announcing a modification to the effective date
contained in the 2006 temporary regulations. See Sec.
601.601(d)(2)(ii)(b). On June 12, 2009, the 2006 temporary regulations
and the related notice of proposed rulemaking were withdrawn and
replaced with new temporary regulations (2009 temporary regulations),
which generally applied to acquisitions completed on or after June 9,
2009. TD 9453 (74 FR 27920, 2009-2 CB 114). A notice of proposed
rulemaking (REG-112994-06) cross-referencing the 2009 temporary
regulations was published in the same issue of the Federal Register (74
FR 27947, 2009-2 CB 144). No public hearing was requested or held;
however, comments were received. All comments are available at
www.regulations.gov or upon request. After consideration of the
comments received regarding whether a foreign corporation has
substantial business activities in a foreign country, the Internal
Revenue Service (IRS) and the Department of the Treasury (Treasury
Department) have decided to issue new temporary regulations under Sec.
1.7874-3T (2012 temporary regulations) and a new notice of proposed
rulemaking that provide guidance regarding this determination. The
other portions of the 2009 temporary regulations are finalized in a
separate Treasury Decision published elsewhere in this issue of the
Federal Register.
Explanation of Provisions
A. General Approach
A foreign corporation is generally treated as a surrogate foreign
corporation under section 7874(a)(2)(B) if pursuant to a plan (or a
series of related transactions): (i) The foreign corporation completes
after March 4, 2003, the direct or indirect acquisition of
substantially all of the properties held directly or indirectly by a
domestic corporation; (ii) after the acquisition at least 60 percent of
the stock (by vote or value) of the foreign corporation is held by
former shareholders of the domestic corporation by reason of holding
stock in the domestic corporation; and (iii) after the acquisition, the
expanded affiliated group that includes the foreign corporation does
not have substantial business activities in the foreign country
(relevant 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 the expanded affiliated group. Similar
provisions apply if a foreign corporation acquires substantially all of
the properties constituting a trade or business of a domestic
partnership.
The 2006 temporary regulations provided that the determination of
whether the expanded affiliated group has substantial business
activities in the relevant foreign country is based on all the facts
and circumstances. The 2006 temporary regulations also provided a safe
harbor, which generally was satisfied if at least ten percent of the
employees, assets, and sales of the expanded affiliated group were in
the relevant foreign country. The 2009 temporary regulations retained
the facts and circumstances general rule provided in the 2006 temporary
regulations, with certain modifications, but removed the safe harbor.
The IRS and the Treasury Department received comments requesting
additional guidance on the level of business activities necessary for
an expanded affiliated group to have substantial business activities in
the relevant foreign country. One comment suggested providing a new
safe harbor, which would require a higher percentage of business
activities in the relevant foreign country than was required under the
safe harbor included in the 2006 temporary regulations. The comment
also recommended different safe harbors depending on the extent of the
expanded affiliated group's business activities in the United States.
After consideration of the comments and the underlying policies of
section 7874, the IRS and the Treasury Department believe the facts and
circumstances test of the 2009 temporary regulations should be replaced
with a bright-line rule describing the threshold of activities required
for an expanded affiliated group to have substantial business
activities in the relevant foreign country. The IRS and the Treasury
Department believe that such a rule will provide more certainty in
applying section 7874 to particular transactions than the 2009
temporary regulations and will improve the administrability of this
provision.
B. Threshold of Business Activities
The 2012 temporary regulations provide that an expanded affiliated
group will have substantial business activities in the relevant foreign
country only if at least 25 percent of the group employees, group
assets, and group income are located or derived in the relevant foreign
country, determined as follows:
1. Group Employees
The 2012 temporary regulations set forth two tests, each of which
must be satisfied, based on employees of members of the expanded
affiliated group (group employees). The first test is calculated as the
number of group employees based in the relevant foreign country divided
by the total number of group employees determined on the applicable
date discussed in section B.4. of this preamble. The second test is
calculated as employee compensation with respect to group employees
based in the relevant foreign country divided by the total employee
compensation with respect to all group employees determined during the
one-year testing period.
2. Group Assets
The group assets test is calculated as the value of the group
assets located in the relevant foreign country divided by the total
value of all group assets determined on the applicable date. The term
group assets generally means tangible personal property or real
property used or held for use in the active conduct of a trade or
business by members of the expanded affiliated group. For this purpose,
group assets include certain property rented by members of the expanded
affiliated group, with the value of such rented property being deemed
to be eight times the net annual rent paid or accrued with respect to
such property. The IRS and the Treasury Department believe that using
an eight-times multiple for this purpose is administrable and
consistent with the treatment of rented property for other purposes.
See, for example, Uniform Division of Income for Tax Purposes Act,
Sec. Sec. 10 and 11. In order to constitute group assets, such rented
property must satisfy the other applicable requirements for group
assets, including that the property is used or held for use in the
active conduct of a trade or business.
3. Group Income
The group income test is calculated as the group income derived in
the relevant foreign country divided by the total group income
determined during the one-year testing period. The term group income
means gross income of members of the expanded affiliated group from
transactions occurring in the ordinary course of business with
customers that are not related persons. Group income is considered to
be derived in a foreign country only if the customer is located in such
country.
[[Page 34787]]
4. Applicable Date
Section 7874(a)(2)(B)(iii) provides that the determination of
whether the expanded affiliated group has substantial business
activities is made after the acquisition. However, the IRS and the
Treasury Department believe that when the acquisition occurs other than
at the end of a month the factors used to determine whether the
substantial business activities test is satisfied may not be readily
determinable in some cases. Accordingly, the 2012 temporary regulations
provide that the number of group employees and the value of group
assets can be measured as of the applicable date, which is either the
date on which the acquisition is completed or the last day of the month
immediately preceding the month in which the acquisition is completed.
The applicable date is also used to determine the testing period, which
is used in computing group income and employee compensation. When the
applicable date is the last day of the month immediately preceding the
month in which the acquisition is completed, group employees, employee
compensation, group assets, and group income consist of those items or
amounts of members that comprise the expanded affiliated group
determined at the close of the acquisition date.
C. Attribution From a Partnership
The 2009 temporary regulations provided that for purposes of the
substantial business activities test, a member of an expanded
affiliated group that holds at least a ten-percent capital and profits
interest in a partnership takes into account its proportionate share of
all items of the partnership. The IRS and the Treasury Department
believe that the policies of section 7874 are better advanced if the
treatment of partnerships is made consistent with that of corporations
for purposes of applying the substantial business activities test on a
group basis. Accordingly, the 2012 temporary regulations provide that
the items of a partnership should be taken into account for this
purpose only if one or more members of the expanded affiliated group
holds, in the aggregate, more than 50 percent (by value) of the
interests in the partnership. The IRS and the Treasury Department
further believe that, consistent with the treatment of corporations, if
this ownership requirement is satisfied, then all the items of the
partnership should be taken into account for this purpose.
D. Effective Date
Subject to a transition rule, the 2012 temporary regulations apply
to acquisitions completed on or after June 7, 2012.
Special Analyses
It has been determined that that these temporary regulations are
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to the 2012 temporary regulations
and because the regulations do not impose a collection of information
on small entities, the requirements of the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply. Accordingly, a regulatory
flexibility analysis is not required. Pursuant to section 7805(f) of
the Code, the 2012 temporary regulations have been submitted to the
Chief Counsel for Advocacy of the Small Business Administration for
comment on their impact on small business.
Requests for Comments
The IRS and the Treasury Department are considering to what extent
partners of a partnership should be treated as if they were employees
solely for purposes of the two tests based on group employees, and
specifically request comments on these issues. For information on how
to submit comments or request a public hearing, see the section
``Comments and Requests for a Public Hearing'' set forth in the notice
of proposed rulemaking published elsewhere in this issue of the Federal
Register.
Drafting Information
The principal authors of the 2012 temporary regulations are Mary W.
Lyons and David A. Levine of the Office of Associate Chief Counsel
(International). However, other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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 1.7874-3T is also issued under 26 U.S.C. 7874(c)(6) and
(g).* * *
0
Par. 2. Section 1.7874-3T is added to read as follows:
Sec. 1.7874-3T Substantial business activities (temporary).
(a) Scope. This section provides rules regarding whether a foreign
corporation has substantial business activities in the relevant foreign
country when compared to the total business activities of the expanded
affiliated group for purposes of section 7874(a)(2)(B)(iii). Paragraph
(b) of this section sets forth the threshold of business activities
that constitute substantial business activities. Paragraph (c) of this
section describes certain items not to be taken into account as located
or derived in the relevant foreign country. Paragraph (d) of this
section provides definitions and certain rules of application.
Paragraph (e) of this section provides rules regarding the treatment of
a partnership in which one or more members of an expanded affiliated
group own an interest. Paragraph (f) of this section provides the dates
of applicability and expiration.
(b) Threshold of business activities. The expanded affiliated group
will have substantial business activities in the relevant foreign
country after the acquisition when compared to the total business
activities of the expanded affiliated group only if, subject to
paragraph (c) of this section, each of the tests described in
paragraphs (b)(1) through (b)(3) of this section is satisfied.
(1) Group employees--(i) Number of employees. The number of group
employees based in the relevant foreign country is at least 25 percent
of the total number of group employees on the applicable date.
(ii) Employee compensation. The employee compensation incurred with
respect to group employees based in the relevant foreign country is at
least 25 percent of the total employee compensation incurred with
respect to all group employees during the testing period.
(2) Group assets. The value of the group assets located in the
relevant foreign country is at least 25 percent of the total value of
all group assets on the applicable date.
(3) Group income. The group income derived in the relevant foreign
country is at least 25 percent of the total group income during the
testing period.
(c) Items not to be considered. The following items are not taken
into account in the numerator, but are taken into account in the
denominator, for each of the tests described in paragraphs (b)(1)
through (b)(3) of this section:
[[Page 34788]]
(1) Any group assets, group employees, or group income attributable
to business activities that are associated with properties or
liabilities the transfer of which is disregarded under section
7874(c)(4).
(2) Any group assets or group employees located in, or group income
derived in, the relevant foreign country as part of a plan with a
principal purpose of avoiding the purposes of section 7874.
(3) Any group assets or group employees located in, or group income
derived in, the relevant foreign country if such group assets or group
employees, or the business activities to which such group income is
attributable, are subsequently transferred to another country in
connection with a plan that existed at the time of the acquisition
described in section 7874(a)(2)(B)(i).
(d) Definitions and application of rules. The following definitions
and rules apply for purposes of this section:
(1) The term acquisition date means the date on which the
acquisition described in section 7874(a)(2)(B)(i) is completed.
(2) The term applicable date means either of the following dates,
applied consistently for all purposes of this section:
(i) The acquisition date; or
(ii) The last day of the month immediately preceding the month in
which the acquisition described in section 7874(a)(2)(B)(i) is
completed.
(3) The term employee compensation means all amounts incurred by
members of the expanded affiliated group that directly relate to
services performed by group employees (including, for example, wages,
salaries, deferred compensation, employee benefits, and employer
payroll taxes). Employee compensation is determined in U.S. dollars
translated, if necessary, using the weighted average exchange rate (as
defined in Sec. 1.989(b)-1) for the testing period.
(4) The term expanded affiliated group means the affiliated group
defined in section 7874(c)(1) determined at the close of the
acquisition date. The term member of the expanded affiliated group
means an entity included in the expanded affiliated group. A reference
to a member of the expanded affiliated group includes a predecessor
with respect to such member.
(5) The term group assets means tangible personal property or real
property used or held for use in the active conduct of a trade or
business by members of the expanded affiliated group, provided such
property is owned by members of the expanded affiliated group at the
close of the acquisition date. A group asset is considered to be
located in the relevant foreign country only if the asset was
physically present in such country at the close of the acquisition date
and for more time than in any other country during the testing period.
All group assets must be valued consistently and on a gross basis (that
is, not reduced by liabilities) using either the adjusted tax basis or
fair market value determined in U.S. dollars translated, if necessary,
at the spot rate determined under the principles of Sec. 1.988-
1(d)(1), (2), and (4). Tangible personal property or real property that
is rented by members of the expanded affiliated group from a person
other than a member of the expanded affiliated group is also treated as
a group asset, provided such property is used in the active conduct of
a trade or business and is being rented by members of the expanded
affiliated group at the close of the acquisition date. For purposes of
this section, a group asset that is rented is valued at eight times the
net annual rent paid or accrued with respect to the property by members
of the expanded affiliated group.
(6) The term group employees means employees of members of the
expanded affiliated group. A group employee is considered to be based
in the relevant foreign country only if the employee spent more time
providing services in such country than in any other single country
during the testing period.
(7) The term group income means gross income of members of the
expanded affiliated group from transactions occurring in the ordinary
course of business with customers that are not related persons. Group
income is translated into U.S. dollars, if necessary, using the
weighted average exchange rate (as defined in Sec. 1.989(b)-1) for the
testing period. Group income is considered derived in the relevant
foreign country only if it is derived from a transaction with a
customer located in such country.
(8) The term net annual rent means the annual rent paid or accrued
with respect to property, less any payments received or accrued from
subleasing such property (or other similar arrangement).
(9) The term related person has the meaning specified in section
954(d)(3), except that section 954(d)(3) is applied by substituting
``one or more members of the expanded affiliated group'' for ``a
controlled foreign corporation'' and ``the controlled foreign
corporation'' each place they appear.
(10) The term relevant foreign country means the foreign country in
which, or under the law of which, the foreign corporation was created
or organized.
(11) The term testing period means the one-year period ending on
the applicable date.
(e) Treatment of partnerships. For purposes of this section, if one
or more members of the expanded affiliated group own, in the aggregate,
more than 50 percent (by value) of the interests in a partnership, such
partnership will be treated as a corporation that is a member of the
expanded affiliated group. Thus, all items of such a partnership are
taken into account for purposes of this section. No items of a
partnership are taken into account for purposes of this section unless
the partnership is treated as a member of the expanded affiliated group
pursuant to this paragraph.
(f) Effective/applicability and expiration dates. Except as
otherwise provided in this paragraph, this section shall apply to
acquisitions that are completed on or after June 7, 2012. For
acquisitions completed on or after June 7, 2012 that were either
described in a filing with the Securities and Exchange Commission on or
before June 7, 2012, or that were subject to a written agreement that
was binding on June 7, 2012, and at all times thereafter, taxpayers may
apply either the rules in Sec. 1.7874-2T(g), as contained in 26 CFR
part 1 revised as of April 12, 2012, or the rules set forth in this
section. The applicability of this section expires on June 5, 2015.
Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
Approved: June 4, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2012-14226 Filed 6-7-12; 4:15 pm]
BILLING CODE 4830-01-P
