Today, Treasury and the IRS issued final regulations (T.D. 9720) under section 7874 regarding when an expanded affiliated group (EAG) will be considered to have substantial business activities in a foreign country. The final regulations adopt much of the 2012 proposed regulations (REG-107889-12), including, for the most part, the latter’s bright-line rule describing the threshold of activities required for an EAG to be considered to have substantial activities in the relevant foreign country. More specifically, under the 2012 proposed regulations, the EAG would be considered to have substantial business activities in the relevant foreign country only if at least 25% of the group employees, group assets, and group income were located or derived in the relevant foreign country. The final regulations retain this rule, but clarify that an entity that is not a member of the EAG on the acquisition date is not a member of the EAG, even though the entity would have qualified as a member if the EAG were determined at some earlier point during the testing period. In addition, the disposition of substantially all the assets of an entity may or may not cause it to cease to be a member of the EAG, depending on whether the entity remains in existence on the acquisition date.
The final regulations are effective June 4, 2015 and apply to acquisitions completed after June 2, 2015.