Treasury Announces New Tax on Offshore Companies

The Treasury Department has issued temporary regulations [1] that require companies that move offshore to inform shareholders and the Internal Revenue Service of the move and to pay capital gains tax on the exchange of stock for stock in a foreign corporation. Typically this will result in a pass through of the capital gains tax to shareholders.

Treasury is hoping the tax requirement will deter some corporations from moving offshore, although the fact that the tax will probably be picked up by shareholders may not be a significant deterrent. "When you really look in depth, the reason we're losing people offshore is the inequity of our tax code as compared to our competitors overseas," said [2] Speaker of the House Dennis Hastert (R-IL) last month in a discussion about the offshore relocations.

Frequently when a corporation relocates offshore, the company changes places with a foreign subsidiary, with the foreign subsidiary becoming the parent company and the original U.S. parent company becoming the subsidiary. This type of transaction is called a corporate inversion, and when the shareholders exchange their stock for stock in the foreign corporation, a taxable event occurs.

In addition, the Treasury Department issued proposed regulations [3] that will require corporations to report to shareholders and to the IRS information regarding a change in control of a corporation or a recapitalization or any other substantial change in capital structure.

Taxpayers wishing to comment on the proposed regulations may do so by posting comments on the IRS Web site [4], or by sending a letter to:

CC:ITA:RU (REG-143321-02)
Room 5226, Internal Revenue Service
POB 7604, Ben Franklin Station
Washington, DC 20044

The comment period deadline has not yet been posted, but can be expected to be displayed on the IRS Web site soon.