Bright-Line Test for Substantial Foreign Business Presence Draws Fire

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Practitioners sharply criticize a new 25 percent bright-line test for determining substantial presence in a foreign country under Section 7874, saying the test will be difficult, if not impossible, for most companies to meet. “They have put forth a rule that cannot be satisfied,” says Michael DiFronzo, an attorney with PricewaterhouseCoopers LLP who worked on previous iterations of the guidance while at IRS. “It's one that many cannot satisfy even in the United States. There is a question of whether or not they've jumped ahead of their authority.” IRS unveiled the test in new proposed and temporary rules June 7, part of the latest iteration of the government's implementation of Section 7874.

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