International Communiqué: New Tax Savings Opportunity Related to International Reorganizations
For years, multi-national companies have faced a wide variety of choices when it comes to their corporate structure. Most multi-national companies operate through a holding company in their home country that owns all or part of several different entities in several different countries. These foreign entities, in turn, may themselves be miniature multi-nationals – owning portions of even more entities in even more countries.
These complicated structures can lead to complicated tax obligations. Every sophisticated company planning an international reorganization is well aware of the complexity of its tax obligations and plans accordingly. Fortunately, the Internal Revenue Service ("IRS") has recently released final regulations that lighten the tax burden of some such reorganizations.
The new IRS final regulations generally reduce the circumstances under which a U.S. company may be taxed for transferring stock or securities to a foreign corporation, an activity that occurs frequently in international reorganizations. They do so by providing more opportunities for companies to avoid triggering Gain Recognition Agreements that must be entered into in accordance with such transfers. Any multi-national company that is considering an international reorganization or has completed one in the past eight years should re-evaluate its tax status in light of these new regulations.
The Internal Revenue Code provides that transfers of property to a foreign corporation are generally taxable. This is meant to discourage the use of foreign corporations as tax-avoidance devices. But a U.S. company may defer or avoid tax on transfers of stock or securities to its foreign subsidiary if the U.S. company enters into a Gain Recognition Agreement regarding the transaction. Pursuant to the Gain Recognition Agreement, the U.S. company must pay tax on the transfer of stock or securities to its foreign subsidiary if any one of a series of triggering events occurs within five years of the transfer. For the most part, these triggering events involve another change in corporate structure.
In 2007, IRS issued temporary regulations that described specific circumstances when Gain Recognition Agreements would not be triggered by what would otherwise be a triggering event. These specific exceptions were meant to prevent certain international reorganizations from being taxed, despite the fact that they occurred under the influence of a Gain Recognition Agreement. Unfortunately, the specific exceptions were heavily criticized for restricting the wide variety of choices that multi-national companies are accustomed to when they are considering an international reorganization.
IRS responded to the criticism concerning the 2007 temporary regulations when it recently released final regulations concerning Gain Recognition Agreements. The final regulations create a general exception to Gain Recognition Agreement triggering events in addition to retaining the specific exceptions found in the 2007 temporary regulations. The general exception is worded broadly to include most non-recognition transactions and will catch many circumstances that would otherwise elude the specific exceptions. This is important news both for companies that are planning an international reorganization and for companies that have recently completed an international reorganization and may be facing a Gain Recognition Agreement triggering event. Such companies may be able to structure their international reorganization or triggering event in a way that reduces taxation.
Filing Deadline for Retroactive Effect
Although the final regulations went into effect on March 13, 2009, taxpayers may be able to take retroactive advantage of them with respect to open tax years. This is important for companies that have recently been taxed for triggering a Gain Recognition Agreement. These companies may find that the triggering event that caused them to be taxed falls under the general exception in the new regulations. If so, these companies have until August 10, 2009 to file an amended return for the applicable open tax years in order to apply the final regulations and reduce or defer tax on their Gain Recognition Agreement.
If your company is considering an international reorganization or has completed one in the past eight years and you would like more information about the new regulations, please contact Matthew P. Forgue (firstname.lastname@example.org) or Joseph J Dehner (email@example.com) at Frost Brown Todd.