Companies 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 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.
An Inverted Domestic Corporation (IDC) is 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.
What is the Effect on Your Government Contract?
The general rule is that the government should to contract to inverted domestic corporations. 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 is key. Bring the issue up to the contracting officer before it is too late
- Consider requesting a waiver. Keep in mind that national security is usually the bedrock for such a waiver.
What Happens If Your 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 ro 6 U.S.C. 395.
When your company meets the legal definition of inverted domestic corporation or a subsidiary of an inverted domestic corporation your
will be required to represent your current status at the earlier of an 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.
For help complying with the inverted domestic corporation rules under 6 U.S.C. 395 (b), call our government contracts law firm at 1-866-601-5518 for a FREE Initial Consultation.