Government Contracting with Inverted Domestic Corporations: Forget About It!
We wanted to alert you to a recent development that may be of interest to the FDI community. On July 1, 2009, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council issued an interim rule prohibiting the award of U.S. government contracts using appropriated funds to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of one. The rule implements Section 743 of Division D of the Omnibus Appropriations Act, 2009 (Public Law No. 111-8). The Department of Homeland Security (“DHS”) has had a similar rule since December 2003, but the new interim rule applies to all federal agencies.
Briefly put, an inverted domestic corporation is one that (1) used to be incorporated in the United States or used to be a partnership in the United States but now (2) is incorporated in a foreign country or is a subsidiary whose parent corporation is incorporated in a foreign country. Congress enacted Section 743 – as well as an earlier tax statute – to discourage would-be corporate expatriates from trying to avoid United States taxes on business income generated in foreign countries by incorporating in “tax havens” such as Bermuda, Barbados and the Cayman Islands.
Section 743 borrows the definition of “inverted domestic corporation” from the DHS statute, which in turn is related to the tax statute. The long three-part definition defines an “inverted domestic corporation” as a foreign incorporated entity that, pursuant to a plan (or a series of related transactions):
- Directly or indirectly acquires 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
- Acquires at least 80 percent of the stock (by vote or value) of the entity 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
- After the acquisition, the expanded affiliated group that 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.
Under the regulatory scheme, an offeror for a U.S. government contract must represent that it is not an inverted domestic corporation or a subsidiary of an inverted domestic corporation. If the offeror cannot affirmatively make such a representation, then the offeror cannot submit an offer absent a secretarial-level waiver that contracting with the inverted domestic corporation or its subsidiary is in the interest of national security.
Because of the complexity of the definition of “inverted domestic corporation,” companies that could be considered inverted domestic corporations should consult legal counsel.
