Sections 355 and 367(e)(1)

Transcription

1 Sections 355 and 367(e)(1) J. Brian Davis Taxation of International Reorganizations Under Section 367 Bloomberg BNA Miami, FL 10 March 2016

2 Contents Corporate tax background Cross-border spin-offs / simple / Foreign complex 2

3 Corporate Tax Background 3

4 Types of Tax-Free Divisive Transactions SPIN-OFF SPLIT-OFF SPLIT-UP A B A B A B 1 2 A B A B A B 1 2 Looks like a DIVIDEND Looks like a REDEMPTION Looks like a LIQUIDATION 4

5 Divisive Paradigms * Standalone 355 D / 355 SH SH Spin off Spin off Existing Business B New stock SH SH Existing New * Assumes spin-off Business B 5

6 Background Separations Under 355 Section 355: Basic tax-free corporate separation requirements Non-tax business purpose Active trade/business conducted by both and At least 80% voting power and at least 80% total number all other classes of held by immediately prior to distribution and is distributed in separations Separation not a device for distribution of E&P of or Certain continuity requirements satisfied Section 355(d) distribution is not a disqualified distribution Section 355(e) no prohibited 50%-or-greater acquisitions of stock of Distribution or in connection with separation Section 355(g) neither nor is a disqualified investment company 6

7 Tax Consequences Standalone 355 * General Assume all 355 requirements satisfied and no boot SH Existing SH Spin off recognizes no gain/loss on distribution of stock to Shareholders. 355(c)(1) If also distributes BIG property, it recognizes gain on that property. 355(c)(2) E&P is decreased (not below 0) by some amount. Reg Generally nothing, as it receives nothing and does nothing Its E&P may remain static, or may be topped-up. Reg Shareholders * All domestic Existing SHs do not recognize gain (nor have income) on receipt of stock. 355(a)(1). SH s basis in stock allocated b/t and stock based on relative FMVs. 358(b)(2) SH holding period in stock is same as its holding period in stock (tacks). 1223(1) 7

8 Tax Consequences D / 355 * General SH A D/355 generally requires that meet the requirements of 368(a)(1)(D) (requires a 355); assume 355 met and no boot Business B stock Spin off generally recognizes no gain/loss on contribution of assets to ( 361(a)) or the distribution of stock ( 361(c)) to SH; however, 355 must be satisfied s tax history/attributes generally stay put. 381(a) New E&P is decreased / allocated to. Reg recognizes no gain/loss on receipt of assets for stock. 1032(a). It takes COB in the assets. 362(b) SH does not inherit s tax history. 381(a) E&P is allocated / received from. Reg * All domestic New Business B Shareholders Same as prior slide no income on receipt of stock, SH basis in stock allocated between and (based on FMV), and holding period tacked 8

9 Cross-Border Spins 9

10 Cross-Border Spins Overview Interplay of policies and rules Tax-free cross-border reorganizations implicate a number of tax policy considerations, including: Tax-free treatment typically premised on mere reshuffling (i.e., simply deferring tax) Is gain that is otherwise subject to tax (e.g., corporate-level gain) leaving the system? Is the restructuring effectuating a change in residual tax (e.g., subpart F thwarted)? Are other tax policies potentially implicated (e.g., is this effectuating an inversion)? In addition to standard corporate tax provisions, cross-border corporate separations demand consideration of a number of other rules: 367(e) 367(b) 1248(a) 1248(f) (a) 367(d) 10

11 Cross-Border Spins Paradigm Matrix DOMESTIC FOREIGN DOMESTIC Spin SH D C SEE NEXT SLIDES Standalone 355 D/355 New D/355 Old Spin SH D Foreign C NOT COVERED TODAY Standalone 355 D/355 New D/355 Old FOREIGN Spin SH D C Foreign SEE NEXT SLIDES Standalone 355 D/355 New D/355 Old Spin SH D Foreign C Foreign NOT COVERED TODAY Standalone 355 D/355 New D/355 Old 11

12 Spins with Overview Starting point 367(a)(3) 367(e)(1) Section 367(a)(1) does not apply to property transferred to the foreign corporation for use by the foreign corporation in the active conduct of a trade or business outside the Distributions described in section 355. In the case of any distribution described in section 355 (or so much of section 356 as relates to section 355) by a DOMESTIC corporation to a person who is not a United States person, to the extent provided in regulations, gain shall be recognized under principles similar to the principles of this section. Statute focuses on status of SHs, but start by looking at status of CONTROLLED Simple FOREIGN CONTROLLED More complex will NOT recognize gain, regardless to whom is spun BUT WAIT!!!! WILL recognize gain per 367(e)(1) if is spun to a foreign person (e.g., FC or someone not a taxpayer) will NOT recognize gain per 367(e)(1) if is spun to a person (e.g., DC or citizen/resident) 12

13 Example 1 : Shareholders General overview Foreign SH Individual Co Assuming all basic 355 tax rules are satisfied, in the normal course the following tax consequences normally occur: normally recognizes no gain on distribution, and allocates some of its E&P to Spin off D Spin off normally no significant consequences (e.g., it takes COB in assets but does not inherit tax attributes or history), although its E&P is likely adjusted C Foreign Shareholders should have no income on receipt of stock, its basis in stock is allocated between and based on FMV, and holding period is tacked Foreign SH Shareholders Individual Co Foreign Shareholders should have no income on receipt of stock, its basis in stock is allocated between and based on FMV, and holding period is tacked. (The last two items normally are not significant considerations for foreign shareholders.) D C How does 367(e)(1) change the above result? Foreign No change to the above treatment does not recognize gain on spin of. See Reg (e)-1(c) 13

14 : Foreign Significantly more complex Where corporate separation involves a CFC, following items take on heightened significance: Status of distributees E&P Separations involving a CFC have the potential to terminate a CFC s status (such as where allocated predominately to foreign persons e.g., split-offs) Although not necessarily implicated here, separations of a CFC may bail out previously untaxed E&P of to and potentially shift those earnings outside tax system (e.g., both and are CFCs) Divisive paradigm under consideration Distinguishing between Standalone 355 and D/355-Oldco and D/355-Newco Interplay of 367 and 1248 rules the regulations are the key Understanding is best achieved through examples starting with Standalone

15 : Foreign (cont.) Key Code provisions in play 367(a)(3) 367(a) and (d) Outbound transfers of property or intangibles to FC 367(e)(1) 355 transactions where is Co (prior slides) 367(b) Other transfers / backstop In the case of exchanges described in, inter alia, 355 or 361, the foreign corporation generally is treated as a corporation except to the extent provided in regulations (i.e., backstops anti-deferral rules) 1248(a) Gain on sale/exchange of stock in certain foreign corporations If a person owns more than 10% of the voting stock of a foreign corporation at any time during the 5-year period (ending on the date of the sale) when the foreign corporation was a CFC, gain recognized on the sale or exchange of such stock treated as deemed dividend to the extent of the foreign corporation s relevant E&P. 1248(f) Certain non-recognition transactions in 1248 context If a Co meets the 1248 ownership requirements w/r/t/ a foreign corporation, and spins off that foreign corporation, gain is generally triggered and treated as a dividend to Co (unless an exception applies). 312-based E&P rules (found at Reg and Prop. Reg (b)-8) 15

16 Example 2 Standalone 355 ( D / Foreign C) Shareholders General analysis Foreign SH Individual Co When a company spins a foreign company, a series of complicated rules must be applied. In general, the order of analysis is as follows: Spin off D Spin off 1. General 355 analysis If is old/cold, this should be straightforward C Foreign If is new (via D reorg), consider 367(a) and (d) (e) analysis (b) analysis Foreign SH Shareholders Individual Co (a) analysis (f) analysis D C Foreign 6. E&P analysis This deck example will assume that the 355 analysis is clean and that is old/cold 16

17 Example 2 Analysis 367(e)(1) Analysis Here is a company, so we must consider 367(e)(1) GENERAL RULE: If distributes to a person who is not a qualified person, then generally shall recognize gain (but not loss) on that distribution under 367(e)(1). See Reg (e)-1(b)(1). Basis spreads evenly. Reg (e)-1(b)(3) Qualified Person defined as (1) a corporation, or (2) a citizen/resident Distributees are presumed to be foreign, unless you can prove otherwise. Reg (e)-1(d)(1) Because some shares of are distributed to Foreign SHs, must recognize gain (if any) on those shares 1248(a) s gain may be recharcterized as a dividend (and carry FTCs) 1248(a) if a person sales / exchanges stock in a FC, and the person owns (or owned) 10% or more of the vote thereof at any time during the 5-year period leading up to the sale or exchange when such FC was a CFC, then gain recognized treated as dividend to extent of attributable E&P Foreign SHs no negative consequences (e.g., no WHT) even though recognizes gain on the distribution. Reg (e)-1(b)(4) 17

18 Example 2 Analysis (cont.) 367(b) Analysis Even though 367(e) has been vetted, 367(b) must be considered 355 requires a corporation be distributed (to get non-recognition treatment), and thus s status is relevant; 367(b)(1) says that in an exchange a foreign corporation will be treated as a corporation except to the extent provided in regulations GENERAL RULE: If distributes to a person who is not a corporation, the generally shall recognize gain (but not loss) on that distribution per 367(b). See Reg (b)-5(b)(1) Distributees are presumed to be individuals, unless you can prove otherwise (using the same principles utilized for 367(e) purposes). Reg (b)-5(b)(3) Because some shares of are distributed to individuals, must recognize gain (if any) on those shares 1248(a) s gain may be recharcterized as a dividend (see prior slide) Individual SHs no negative consequences, even though recognizes gain on the distribution. Reg (b)-5(b)(1)(ii) ( s status change only impacts ) 18

19 Example 2 Analysis (cont.) 1248(a) Analysis As already noted, may be required to recognize gain on the 355 distribution of due to 367(e) and 367(b) (i.e., unless distributees only were corporations); as a result, must perform 1248(a) analysis. Cf. Reg (f)-1(b)(2). (See prior slides) 1248(f) Analysis Assuming has not already fully-recognized all gain in stock, it must still assess the tax consequences on the shares that were spun to corporations. This implicates the 1248(f) rules, which address 1248 scenarios involving non-recognition transactions: 1248(f) Except as provided in regulations: (f)(1) General Rule. If a corporation satisfies the stock ownership requirements of 1248(a)(2) w/r/t a foreign corporation, and that corporation distributes stock of the foreign corporation in a distribution to which 355(c)(1) or 361(c)(1) applies, then notwithstanding anything else the corporation will recognize gain (treated as a dividend if appropriate under 1248 principles) (f)(2) Exception. In the case of any distribution of stock of a foreign corporation, 1248(f)(1) shall not apply IF (1) such distribution is to a company that holds 10%+ of the foreign corporation (right after the spin) and (2) that company is treated as holding that stock for the period for which the stock was held by the corporation (i.e., the Distributor s holding period) 19

20 Example 2 Analysis (cont.) 1248(f) Analysis (cont.) Because the exception at 1248(f)(2) cannot apply, must consider the 1248(f) regulations GENERAL RULE. The 1248(f) regulations provide that will not recognize gain in respect of stock spun to corporations that own 10%+ of post-spin provided: (1) and all such distributees enter into a written agreement to preserve the 1248 amount, (2) The distributees holding periods in stock are adjusted to correspond with s holding period, and the distributees bases in stock may be reduced (where necessary) to ensure that pre-spin gain is preserved; and (3) These same parties all join in making an irrevocable election. See Reg (f)-2(b) E&P Analysis A critical piece of the analysis, but far beyond scope of this presentation May have material impact on the transaction and going-forward tax planning for companies See Reg and Prop. Reg (b)-8 for guidance 20

21 Thank You! 21

22 J. Brian Davis BRIAN DAVIS is a partner in the Washington, D.C. office of Ivins, Phillips & Barker. He has practiced in all areas of U.S. federal income taxation, with considerable experience assisting public and private businesses with U.S. corporate tax and global tax planning matters. He regularly serves as a trusted tax adviser to Fortune 100 companies, and has also worked in industry as Director of International Tax for a publicly-traded global media conglomerate. Brian is regularly engaged by corporate, tax and accounting executives seeking proficient and pragmatic advice regarding domestic and cross-border tax structuring and execution matters, and troubleshooting of domestic and international tax issues. Brian regularly speaks at events sponsored by the Tax Executives Institute, the International Fiscal Association, the American Bar Association and independent finance and accounting/tax executive associations. He also periodically teaches a course on corporate taxation at the George Mason University School of Law. Brian earned his LL.M. in Taxation from New York University School of Law, and his J.D. and B.S. from the University of Oregon. Partner Corporate / M&A / International Tax Washington, D.C. bdavis@ipbtax.com O: M:

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