Defending Worldwide Taxation with a Shareholder-Based Definition of Corporate Residence
35 Pages Posted: 5 Mar 2017 Last revised: 29 Aug 2017
Date Written: February 6, 2017
This Article argues that a principled, efficient, and practical definition of corporate residence is necessary even if some form of corporate integration is adopted, and that such a definition is a key element in designing either a real worldwide or a territorial income tax system as well as a potential restraint on the inversion phenomenon. The Article proposes that the United States adopt a shareholder-based definition of corporate residence that is structured as follows:
1. A foreign corporation is a U.S. tax resident for any year if fifty percent or more of its shares, determined by vote or value, was beneficially owned by U.S. residents on the last day of the immediately preceding year (or was the average ownership for the year by U.S. residents as determined by averaging U.S. resident ownership on the last day of each quarter of the preceding year). A foreign corporation presumptively satisfies this test if any class of its shares is regularly traded in one or more U.S. public capital markets or is marketed to U.S. persons.
2. This presumption can be rebutted by the foreign corporation showing that U.S. resident beneficial ownership of its shares is below the fifty-percent threshold.
3. The presumption can be overcome in the same way by the IRS if it encounters cases where a foreign corporation that is actually foreign-owned lists a class of shares on a U.S. exchange in order to achieve U.S. resident status for tax-avoidance reasons.
This proposed shareholder-ownership test, however, would be an alternate definition; a corporation would continue to be a U.S. tax resident if it were formed under the law of a U.S. jurisdiction. Finally, this Article examines the common objections to a shareholder-based definition of corporate residence and explains why those objections are unpersuasive.
Keywords: Income Taxation, International Taxation, International Income Taxation, Residence, Corporate Residence
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