You flipped to Delaware because your investors required it. Now your team is in Europe, your customers are in Europe, and you're paying US lawyers to maintain a shell in a state you've never visited. You want out. But how?
We dug into the tax code, talked to advisors, and mapped the unflip. The short version: it's doable — especially if your operations are already in the EU — but the path matters.
The standard advice: liquidate and start over
The standard approach: dissolve the US C Corp entirely. The IRS treats this as a deemed sale of all assets at fair market value under IRC Sections 331 and 336 [1]. The tax hit comes in two layers.
First, the corporation pays 21% federal tax on all appreciated assets — fair market value minus cost basis. For a startup whose main asset is IP, the basis is near zero, so you're looking at 21% of total assessed value.
Second, US shareholders pay capital gains tax (15–23.8%) on the liquidating distribution. Combined, the effective rate can reach 40–50% of appreciated value.
Before 2017, exceptions existed for assets used in active foreign businesses. The Tax Cuts and Jobs Act repealed them, closing the last escape hatch for outbound transfers.
Indian startups that reversed their flips — Meesho, Razorpay, PhonePe — paid 5–8% of their valuations in exit tax. PhonePe's bill was roughly one billion dollars.
For most European startups, this is a non-starter.
The better path: EU parent, US subsidiary
Instead of killing the US entity, you place a new EU holding company above it. The Delaware C Corp stays alive as a subsidiary. No liquidation, no corporate-level exit tax.
This mirrors the original flip — a US parent was created above your EU operating company, shareholders swapped shares. Now you reverse it.
The problem: US tax law makes this easy inbound and hard outbound. IRC Section 7874, the anti-inversion statute [2], says if former shareholders own 80%+ of a new foreign parent, the IRS treats the foreign parent as a US company. The restructuring becomes pointless.
Between 60–80% ownership, you land in the "penalty box" — the foreign parent is respected as foreign, but the expatriated entity loses access to NOLs, foreign tax credits, and other attributes for ten years.
The exception that makes it work
Section 7874 has a crucial escape hatch: the substantial business activities exception [2]. If you have substantial business activities in the new parent's country of incorporation, the anti-inversion rules don't apply.
"Substantial" means meeting all four tests simultaneously [3]. Bright-line tests — you pass or you don't.
- At least 25% of employees in the country of incorporation
- At least 25% of total compensation paid there
- At least 25% of tangible assets located there
- At least 25% of group income generated there
For the typical Undelaware customer — European founders with a European team, European customers, and a Delaware holding shell — this is easy. If 70–90% of your operations are in one EU country, you clear 25% by a wide margin.
The critical detail: the test is per country, not EU-wide [3]. If your new parent is in the Netherlands but your team is split between Sweden and Germany, only Dutch headcount counts. You must incorporate where your operations are concentrated.
One caveat: the regulations include an anti-abuse provision. Employees or assets relocated to the target country "as part of a plan with a principal purpose of avoiding Section 7874" are disregarded. Your EU operations must be genuine, not hastily assembled for the transaction.
The remaining cost: Section 367(a)
Even when the 7874 exception applies, US shareholders still face a tax event. When they exchange US corp shares for EU parent shares, IRC Section 367(a) treats it as a taxable exchange [4]. They owe capital gains on the difference between fair market value and cost basis.
In theory, Treasury Regulation 1.367(a)-3(c) offers an exemption — but it requires US transferors receive no more than 50% of the foreign corporation and a 36-month active business history. In a typical unflip, these conditions fail.
Tax advisors call this a "dry tax" — taxable gain with no cash received. But it's far smaller than full liquidation. No corporate-level tax — the US entity isn't dissolved. EU-resident shareholders are generally exempt. And shareholders owning 5%+ can defer for five years via a Gain Recognition Agreement [5].
What the total cost looks like
For a European startup with EU-heavy operations and a US holding shell, the realistic cost:
- Corporate-level exit tax: zero — the US entity stays alive as a subsidiary
- US shareholder gain tax: 15–23.8%, deferrable five years via GRA
- EU shareholder gain tax: generally zero
- Delaware franchise tax: ongoing (entity remains active)
- Dividend withholding (US sub to EU parent): 5–15% under treaty
Compare this to 40–50% for a full liquidation. For most European founders, that's the difference between feasible and impossible.
The step-by-step process
The unflip takes six to twelve months for an early-stage company.
Assessment — Analyze structure, cap table, contracts, IP ownership, and tax exposure. Identify which country holds 25%+ of operations across all four metrics.
Investor consent — Preferred stockholders almost always have protective provisions requiring approval. SAFEs and convertible notes may have change-of-control clauses. Get buy-in early.
Legal execution — Form the EU holding company, execute the share exchange, replicate share classes and investor rights, convert option plans to local schemes, and file in both jurisdictions.
Operational transition — Migrate bank accounts, payroll, insurance, and contracts. The US sub continues for any remaining US obligations.
Timing is everything
The most important variable is timing. The 367(a) toll charge scales with fair market value. Pre-revenue or pre-Series A, the tax is minimal. Post-raise, it scales with valuation.
If you're thinking about unflipping, the best time was before your last round. The second best time is now.
What EU-Inc changes
The EU-Inc regulation, expected to be formally proposed in March 2026, would create a single European corporate form with 48-hour digital incorporation, standardised stock option treatment, and seamless cross-border seat transfers [6].
It won't eliminate the US-side tax — that's American law. But it simplifies the European side dramatically. Instead of 27 national company forms with different rules, founders get one standardised entity that investors across Europe already understand.
EU-Inc makes the unflip simpler. Financing the exit tax makes it affordable. That's what we're building.