By: Theodore P. Watson, Esq.

inverted domestic corporation lawyersCompanies doing business with the federal government should be aware that a violation of the rule against doing business with an inverted domestic corporation is alive and well.  If you are a company with various aspects of the company operating overseas, you should carefully review the layout. Otherwise, you can lose a multi-million dollar contract if found in violation.

Congress has attempted to implement both tax code regulations and government contract regulations. The federal government now has increased its oversight to enforce the end goal. As a result, more companies will experience adverse decisions and even government investigations about the company structure and whether or not contractors violate the inverted domestic corporation rules under government procurement laws. 

Federal Contracting Agencies are Prohibited from Giving Contracts to Inverted Domestic Corporations?

Federal government agencies are not permitted to use appropriated (or otherwise made available) funds for government contracts with either an inverted domestic corporation or a subsidiary of an inverted domestic corporation under FAR 52.212-3, unless the exception at FAR 9.108-2(b) applies or the requirement is waived in accordance with the procedures at FAR 9.108-4.

When you bid on a federal contract, you have to certify that your company is not an inverted domestic corporation.

  • What are the consequences if you misrepresent your company? That depends on the agency and how far they are willing to push back. The key point is that you understand whether or not you are such a company before you submit a bid.
    • By submission of its offer, the offeror represents that it is not an inverted domestic corporation; and
    • It is not a subsidiary of an inverted domestic corporation.

Furthermore,  if you are caught violating the laws governing inverted domestic corporations, you could be charged criminally for false claims against the government, fraud and other related crimes. Never take chances not that government investigations are on the rise. Make sure that your company is ‘above water.’

DoD, GSA, and NASA adopted as final, without change, an interim rule which amended the Federal Acquisition Regulation (FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation)to implement a section of the Consolidated Appropriations Act, 2012, that prohibits the award of contracts using appropriated funds to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of such entity.

Definition of an Inverted Domestic Corporation

An Inverted Domestic Corporation (IDC) is defined as a company that was previously incorporated in the United States or was a partnership in the US but has now incorporated in a foreign country, or that have now become subsidiaries whose parent corporations are now incorporated in a foreign country. The technical definition of an inverted domestic corporation can be found in  (b):

(b) Inverted domestic corporation For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—      (1) the entity completes before, on, or after November 25, 2002, the direct or indirect acquisition of 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; 

     (2) after the acquisition at least 80 percent of the stock (by vote or value) of the entity is 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 

     (3) the expanded affiliated group which after the acquisition 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. 

See also

Under the Act, an inverted domestic corporation is

  • A foreign incorporated entity that has acquired substantially all the properties or assets of a domestic corporation at any time. or domestic partnership pursuant to a plan or series of related transactions; and
  • After the acquisition
    • There is greater than 50% of the stock (by vote or value) of the entity is held by former shareholders or partners of the domestic entity; or
    • The expanded affiliate group which includes the entity—as defined by the Internal Revenue Code (IRS) and the other agency statutes—is managed and controlled mostly in the U.S. and has significant U.S. business activities, measured by employee location and compensation, location of assets, and derivation of income.

How Can An Adverse Decision Impact Your Government Contracts?

The general rule is that the government should not contract to inverted domestic corporations. Your misrepresentation to the government can create headaches that CEO’s don’t need. Note, that the exception to the rule can be found at FAR 9.108-2. However, the Federal Acquisition Regulations (FAR) that implement  the restrictions on government contracting with inverted domestic corporations generally reflect that agencies “shall” waive the prohibition when a waiver is determined to be “required in the interest of national security.” See FAR 9.108-4 providing that the prohibition “may” be waived in such circumstances.

  • Disclosure and proper representation are key. Bring the issue up to the contracting officer before it is too late.
  • Failure to disclose could very well cause criminal liability and government investigations (not something companies want to deal with every day.)
  • If the government finds that a waiver is not required, after non-disclosure, the non-disclosure aspect could take a turn for the worse.
  • Consider requesting a waiver. Keep in mind that national security is usually the bedrock for such a waiver.

As a Small Business Do You Feel Impacted?  If So, Finding a Solution is in Order.

During the comment session for FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation, the government concluded that the final rule did not directly impact small business government contractors. The reason was that the rule only extended to the existing prohibition on contracting with inverted domestic corporations to acquisitions using FY funds, and the prohibition relates to foreign entities that are also generally large multinational corporations.

The government also felt that because that these particular entities are now prohibited from contracting with the Federal Government that it will not have a significant impact on a substantial number of small entities, because it would only remove an insignificant number of competitors and Government awards may still go to either large or small businesses, either domestic or foreign.  

There may not be much hope for changing the rule. However, if you are a domestic company and is significantly impacted by the rule, then you must come to the table and figure out how you can rearrange your business operations but still stay compliant with the rules. 

Companies caught intentionally violating the inverted domestic corporation rule could potentially be charged with some level of criminal activity or recommended for suspension and debarment. The best thing to is to avoid confrontation from the government.

What Happens If Your Business Status Changes During Contract Performance?

If your status changes to where you now meet the legal definition of an inverted domestic corporation or a subsidiary of an inverted domestic corporation, you must disclose this information to the contracting officer. Many government contractors find themselves investigated because they do not follow the FAR regulations or 6 U.S.C. 395. 

When your company meets the legal definition of an inverted domestic corporation or a subsidiary of an inverted domestic corporation you will be required to represent your current status at the earlier of the offer submission or the annual anniversary of the registration in the System for Award Management (SAM). 

If you forget to correctly represent your company, there could be consequences given the intent of the regulations.

What is the Bottom Line for Government Contractors?

At the end of the day, the reality that the law stands. Contractors that are doing business with the federal government could potential face criminal liability under the tax codes PLUS defaults or criminal liability under federal procurement law.

Although the government admits that there is some impact to small business, then if you are part of the impacted group, you may want to look at your business relationships to see if small business size status can be impacted ( if so, then the business future could be at risk). The other alternative would be to see if you are eligible for the inverted domestic corporation waiver.


For help complying with the inverted domestic corporation rules under 6 U.S.C. 395 (b) and FAR 52.209-2 Prohibition on Contracting with Inverted Domestic Corporations-Representation., call our government contracts law firm at 1-866-601-5518 for a FREE Initial Consultation.