U.S. International Tax Law–11
U.S. Intl. Corporate Tax
Alternative cross-border corporate
structuring or restructuring situations:
1) Outbound - incorporation or liquidation.
2) Inbound – liquidation of foreign sub
3) Foreign to foreign restructuring
U.S. income tax objective: maintain U.S.
taxing jurisdiction over previously accrued
value (income). See §§367, 1001 & 1248.
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Possible Corporate
Structuring Transactions
Subchapter C Rules:
1) Corporate formation - §351 –corp. formation
no gain or loss recognition
2) Liquidations - §§331 (taxable) & 332
(tax-free) - corp. liquidation proceeds to
shareholder
3) Tax-free reorganizations - §368(a)(1)
4) Corporate divisions - §355 & §368(a)(1)(D)
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Corporate Formation §351
No gain or loss is recognized if:
(i) property is transferred to a corporation
solely in exchange for stock, and
(ii) immediately after the exchange the
transferors are in control of the
corporation.
Similar treatment for a “contribution to the
capital” of a corporation. See §367(c)(2).
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1
Taxable Corporate
Liquidations- Shareholders
1) §331(a) - complete corp. liquidation
to shareholders is treated as a
distribution in exchange for stock.
§331(a).
2) If foreign corp. (CFC) proceeds are
received by a greater than 10% U.S.
shareholder, the gain may be treated
as ordinary income under §1248.
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Tax-free Corporate
Liquidations - §332
Liquidation of U.S. sub into U.S. parent:
1) no gain is recognized to the distributing
corporation - §337(a); and,
2) no gain is recognized to the recipient
parent corporation under §332.
Cross-border options in this context:
1) Foreign sub into U.S. parent (inbound)
2) U.S. sub into (c)foreign
parent (outbound).5
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Corporate Tax-free Acquisitive
Reorganizations
Tax-free exchanges of corporate stock if a
proprietary interest is maintained in
corporate form. IRC §368 provides the
definition of “reorganization” types.
U.S. tax common law requirements:
1) Business purpose;
2) Continued proprietary interest; and,
3) Continuity of business enterprise.
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2
Types of Acquisitive
Corporate Reorganizations
§368(a)(1)(A) - statutory merger or
consolidation - the surviving corporation
must be a U.S. corporation to effect a
merger under U.S. laws (or foreign?).
B reorg. - “stock for stock” exchange.
C reorg. - stock for assets exchange.
Plus: triangular reorganizations (forward
& reverse triangular mergers).
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Corporate Divisions
§355
1) Spin-off - distribution of stock of a
controlled corporation - cf., dividend.
2) Split-off - shareholders give up a portion
of their stock in exchange for the stock of
the controlled subsidiary - cf., redemption.
3) Split-up - stock of two or more subs
distributed in liquidation of corporation cf., liquidation.
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Code §355 Requirements
1) Control of stock of subsidiary to be
distributed.
2) Both corps engaged in business
immediately after the distribution.
3) All (or most) of stock of sub to be
distributed to shareholders.
4) Transaction not used principally as a
“device” for the distribution of earnings.
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3
Anti-Importation of Loss
Rules
§362(e) limits tax basis upon the corporate
acquisition of loss property.
Total adjusted bases of the transferred
properties must exceed the FMV of
transferred properties immediately after
the transaction for this limitation to apply.
§362(e)(2)(A)(ii).
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Outbound exchange
situations - §367(a)
1) Transfer of appreciated assets to a
foreign corp. in an incorporation.
2) U.S. corporation is liquidated and
assets are distributed to foreign
shareholders.
3) Reorg. - Stock (or assets) of a U.S.
corporation are acquired by foreign
corp. for foreign corp. stock.
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Outbound Triangular
Reorganizations
1) Forward triangular merger.
2) Reverse triangular merger.
3) “B” reorganizations - stock of
foreign corporation is received for
domestic stock.
4) “C” reorganization - stock of
foreign corporation is received by
domestic sub for domestic assets.
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“Other” Transfers
§367(b)
1) Inbound liquidation of foreign
corporation into U.S. corporation.
2) Stock of foreign corporation owned
by U.S. shareholders acquired for stock
of U.S. corporation (i.e., inbound).
3) U.S. shareholder of foreign
corporation exchanges stock for other
foreign corporation stock.
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Alternative tax treatments
for cross-border transfers
Outbound transfers:
1) Tax all appreciation when (a) all or (b)
certain assets are transferred outbound.
2) No tax when appreciated assets are
transferred outbound.
3) Obtain a ruling in advance - tollcharges
imposed on transfers of certain assets.
4) Ruling request within 183 days after the
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transaction - with
anticipated
tollcharges.14
§367(a) - Treatment for a
§351 Transaction
Code §351 eligibility is permitted based on
the current inclusion in the U.S. income tax
base of the accrued appreciation
attributable to certain assets transferred to
the foreign corporation.
Code §367(a)(1) – is the recipient
corporation treated as a “corporation” for
federal tax purposes? Otherwise, no
Subchapter C treatment.
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Transfers to Other Foreign
Entities
1) §§1491-1494 excise tax provisions for
outbound transfers. Repealed in 1997.
2) §367(d)(3) and §721(c) permit
regulations on transfers to foreign
partnerships. Cf., §704(c).
3) §684 concerning required gain
recognition on transfers of appreciated
property to foreign trusts.
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§367(a) Requirements for
Outbound Transfers
A foreign corporation is not treated as a
"corporation". §367(a)(1). What is the
effect of this treatment for §351 purposes?
Possible taxation of asset transfers:
consider tax character and source. And,
then, tax basis adjustment.
Exception is available for property
transferred for use in the “active conduct”
of foreign trade (c)
orWilliam
business.
§367(a)(3)(A).
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Other §367(a) Outbound
Transfers
1) Outbound liquidation.
2) Outbound corporate reorganization.
Consider also:
- Transfer of partnership interest to
foreign corporation - §367(a)(4).
- Change in tax classification of the
entity from (e.g., partnership) to
corporation.
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6
Defining an “Active Trade
or Business”
§367(a)(3)(B) applicability.
1) What is the “trade or business”?
2) “Active conduct” of business necessary.
Substantial managerial and operational
activities (not merely holding stock).
3) Conducted outside the United States.
4) Property is used in the trade or business
(not listed stocks and bonds).
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Automatically Tainted
Assets §367(a)(3)(B)
1) Inventory.
2) Installment obligations and accounts
receivable.
3) Foreign currency and property
denominated in foreign currency.
4) Where transferor is a lessor, unless
transferee was the lessee (or, next slide).
5) Depreciable property - to the extent tax
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depreciation claimed
against
U.S. income.20
Property to be Leased by
the Transferee
Treated as active conduct of trade or
business property if:
1) Leasing of property constitutes active
conduct of a leasing business;
2) Property is not used in the United States;
3) Need exists for substantial investment in
the assets of the type transferred.
Must be substantial marketing and
customer service.
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Outbound Transfer of
Corporate Stock
Ordinarily outbound corporate
reorganizations, rather than §351
incorporations.
General rule of taxability upon the transfer
of stock or securities of foreign
corporations. Possible “GRA” alternative.
“Limited interest in transferee” exceptions.
(next slides)
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Transfer of Foreign
Corporation Stock
1) U.S. transferor owning less than 5
percent of the stock of the transferee - no
current U.S. income tax effect.
2) U.S. transferor owns more than 5
percent, then a five year gain recognition
agreement (GRA) to avoid gain
recognition.
3) If foreign corporation moves from CFC
to non-CFC status - §1248 pickup.
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Transfer of U.S. Corporate
Shares to Foreign Corp.
No gain recognition if:
1) U.S. transferors with less than 50%
ownership of the transferee (next slide).
2) Transferee is engaged in active conduct
of a trade or business for 36 months prior
to the transfer (and no sale anticipated).
3) U.S. transferor (i) owns less than 5% or
(ii) if a 5% or greater U.S. transferor, has a
gain recognition(c)agreement
(GRA).
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U.S. Corp. - U.S.
Shareholder Status?
As relevant for the tax-free exception for
U.S. transferors with less than 50 percent
ownership of transferee (p. 753):
1. Presumption that transferors are U.S.
persons.
2. Obtain ownership statements from
foreigners to show the 50 percent U.S.
ownership threshold is not exceeded.
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Corporate Inversions
U.S. corporation transformed into a foreign
corporation. Future avoidance of U.S.
income tax.
No CFC status.
Treatment of the shareholders? Tax
recognition on transformation of entity.
Transfer pricing/earnings stripping
opportunities?
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2004 JOBS Act Corporate
Inversion Rules
§7874 - two different types of inversion
transactions:
1) 80%+ stock identity – former shareholders
own at least 80%.
Foreign corp. deemed to be domestic.
2) 60-80% stock identity – corporate level gain
recognized on stock & asset transfers.
Plus, §4985 excise tax on stock options.
Plus, §6043A IRS information reporting.
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Outbound Transfers of
Intangibles
Prior objective: (1) incur costs and deduct
under §174 against U.S. source income and
then (2) transfer the (zero basis) asset to a
foreign subsidiary. Subsequent foreign
income from using the intangible is
immune from U.S. tax (possibly subject to
Subpart F rules). Under §367(d) - treated
as selling property in a licensing
transaction.
(next slide)
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Outbound Transfers of
Intangibles, continued
Amounts to reflect a reasonable royalty or
disposition proceeds if a disposition by the
foreign subsidiary occurs.
§367(d)(2)(B) specifies a reduction of the
E&P of the foreign corporation for the
deemed royalty payments.
§367(d)(2)(C) - ordinary income from
sources without United States. Prior
sourcing rule changed
in 1997. (next slide)29
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Outbound Transfer of
Intangibles, continued
Super-royalty provision applicable §367(d)(2)(A).
Exception for foreign based goodwill which
is transferred.
Planning option: use a licensing agreement
to transfer intangibles - then the pricing is
determined under §482.
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§367(d), continued
e) until TRA-97, also treated as U.S. source
income. Now treated as foreign source.
f) exception for foreign goodwill or going
concern value.
g) valuation problems – super-royalty
provision, i.e., amount treated as received
must be “commensurate with income”.
h) Foreign corp. E&P reduction §367(d)(2)(B)
cont.
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§367(d), continued
Other §367(d) considerations:
- Use a sale/license rather than §351 transfer?
- Royalty is treated as an account receivable
under §367(d).
- Elect sale treatment? U.S. source ordinary
income; Reg. §1.367(d)-1T(g)(2).
-Transfer to a partnership – see §367(d)(3)
(note partnership tax rule in a Subchap. C §).
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“Property” Requirement a Code §351 Element
Rev. Rul. 64-56 - does “know-how” constitute
“property” for §351? Or services?
To be “know-how” the country where the
transferee operates must afford the transferor
substantial legal protection against the
unauthorized disclosure and use of the
process, formula, or other secret information
involved. See Rev. Proc. 69-19.
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“Property” Transfer
Requirement - §351
Transfer must be made of "all substantial
rights" for a property transfer to occur for
§351 purposes.
Ordinarily, the transfer of economic rights for
intangibles is accomplished by an exclusive
license, rather than by a legal assignment.
Retention of certain controls and rights of
recapture may be acceptable for this purpose.
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Dupont case
Non-Exclusive License
Royalty-free non-exclusive license to sub to
make, use and sell the product in France.
Holding: §351 does not embody the same
concepts as the capital gains provisions.
Capital gains contemplate completeness of
disposition, but §351 is based on control over
the transferred rights.
Held: Non-exclusive license to the subsidiary
was
a transfer of "property"
for §351.
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Transfer as a “Contribution
to Capital”
§367(c)(2) - contribution to corporation
treated as a constructive exchange for §367
purposes.
If the transfer is made of an appreciated
“intangible” - then subject to the further
provisions of §367(d).
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Outbound Transfer of
Intangibles, continued
Disposition of transferred intangible
accelerating transferor’s gain recognition.
§367(d)(2)(A)(ii)(II).
Option to elect to treat transfer of
intangible as a deemed sale at fair market
value. Ordinary gross income in the year
of transfer, but probably U.S. source.
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Foreign Branch Loss
Recapture Rules
U.S. taxpayer operates foreign branch at a
loss. These losses reduce U.S. taxable
income.
Then, transfers of foreign branch assets to
foreign corporation. Foreign profits are
then immune from current U.S. income tax
(assuming Subpart F is not applicable).
Branch loss recapture rules are applicable
under §367(a)(3)(C).
(next slide)
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Foreign Branch Loss
Recapture, continued.
Recapture the gain to the extent of
previously unrecaptured losses of the
branch.
Type of recapture depends upon whether
previously deducted as (1) an ordinary loss
or (2) a capital loss.
Note: Foreign tax credit provision
(§904(f)(3)) takes precedence in
determining recapture.
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13
Liquidation of U.S. Corp.
into Foreign Parent
§367(e)(2) denies nonrecognition of gain to
a U.S. corporation making a liquidating
distribution to a foreign parent corporation
(80 percent or more). Cf. §§332 & 337.
Exceptions (in regs): (1) when distributed
assets are used in a U.S. trade or business;
or, (2) if a U.S. real property interest.
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Liquidation of Foreign Corp
into Foreign Parent
No gain recognition on a “foreign to
foreign” liquidation. §332.
But, gain recognition is required if U.S.
trade or business assets are transferred,
unless the ten year gain recognition rule is
applicable. Why?
Exception from gain recognition when U.S.
real property.
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Outbound Spinoffs
§367(e)(1)
Distribution of stock of sub by a U.S.
corporation to a foreign person.
If U.S. corporation distributes stock or
securities of a U.S. or foreign subsidiary to
a foreign person in a §355(a) transaction
the distributing corporation recognizes
gain under §367(e)(1).
(exceptions, next slide)
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Outbound Spinoffs, cont.
Exceptions: 1) After distribution both
distributing and distributed controlled
corps are U.S. real property holding corps.
2) 80% or more of stock of the U.S. corp is
to distributees holding 5% or less of the
distributing corp's stock, i.e., publicly held.
3) Distributing corp agrees to file an
amended return if foreign distributee of
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U.S. stock disposes
ofP.that
Outbound Transfers to
Partnerships and Trusts
Excise tax - §1491; repealed in TRA-97.
§684 - gain recognition on transfers of
appreciated property to foreign trusts and
estates.
§721(c) regulatory authority re
contributions of appreciated property to
partnerships.
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§367(b) Objectives
Nonoutbound Transfers
1. Implement §1248 treatment
- require recognition where §1248 gain
would slip out of U.S. tax base or retain
§1248 treatment for the future if
postponement currently permitted.
2. E&P of foreign corporation moves up
the ownership chain for corporations.
3. U.S. shareholder status – CFC?
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§367(b) - Foreign Sub into
U.S. Parent
Complete Liquidation of Foreign Sub into
U.S. Parent Corporation:
Pickup of the “all earnings and profits
amount” by the U.S. shareholder.
Reg. §7.367(b)-5(b).
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§367(b) - Foreign Sub into
Foreign Parent
Liquidation of Foreign Subsidiary into
Foreign Parent Not a gain recognition event.
E&P moves up.
Reg. §7.367(b)-5(c).
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Share Exchanges
1. CFC to non-CFC
§1248 pickup.
Indirect FTC to corporate shareholder.
2. Exchange of second tier CFC stock by
CFC for foreign corp. stock where not CFC
status – §1248 move-up.
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