International Tax Free Reorganizations
Topics: international tax, douglas stransky, reorganizations, attorney
In the world of international business, corporations that operate in different countries sometimes pursue reorganizations. They may do this to streamline operations to maintain a competitive advantage. They may also do it to change their corporate ‘persona’ with a new management and operating structure. When a multinational corporation reorganizes, it takes into consideration the tax implications.
What is an international tax-free reorganization?
It’s a transaction whereby one corporation acquires the stock or assets of another corporation. They may acquire part, or all, of the stock or assets of the target company. These two companies are ‘commonly controlled companies’. This ‘common control’ occurs when two or more businesses have the same entity controlling them.
In reorganizations, one company is the target. The target liquidates into the common parent after the reorganization. If the parties to the reorganization meet U.S. Internal Revenue Code (IRC) stipulations then the transaction is not taxable.
When one corporation acquires the assets of another corporation it must give ‘consideration’. In the tax-free reorganization, this involves transactions between commonly controlled corporations as previously stated. The acquiring company must give some of its stock as part of the ‘consideration’. The targeted company must distribute this consideration to its shareholders when it liquidates completely.
The name for the above transaction is an Acquisitive or Non-Divisive D Reorganization. The target company is obligated to transfer all or ‘substantially all’ of its assets to the acquiring company. The distribution element of the transaction (‘consideration’ to the targeted company’s shareholders) must meet IRC 354 regulations.
In an international tax-free reorganization, the acquiring company receives the target’s operating assets. However, there are qualifying requirements to receive the designation as a Non-Divisive D Reorganization according to the IRC.
The basic qualifying requirements are:
1. The target company transfers most or all of its assets to the acquiring company. The acquiring company receives at least 90% of the Fair Market Value (FMV) of net assets of the target company. The ‘net value’ of assets is Total Assets minus Total Liabilities of the company. Another measurement is that the acquiring company receives 70% of the FMV of gross assets. These are assets without any of the company’s liabilities taken into consideration.
2. The company targeted in the reorganization, distributes the stock or securities received from the acquirer as consideration. With a ‘plan of reorganization’, the targeted company gives to its shareholders the stocks, securities and other properties received. It also distributes to its shareholders any of its remaining properties to complete the liquidation process.
There may be other property, other than that allowed by IRC stipulations that the target receives. The target company has to record a ‘gain’ according to the FMV of this property. This gain is taxable.
3. The target company shareholders must retain substantial continuing proprietary interest in the business that transferred to the acquiring company. At least 50% of the consideration paid to the target company shareholders must be the acquiring company’s stock.
4. The acquiring company must continue operating a major portion of the target company’s historic business. At the very least, it must use a significant portion of the target company’s historic assets in the operation of the business.
5. There must be a business purpose for the reorganization. It cannot be tax-motivated or conducted to avoid or evade taxation.
6. There must be a ‘plan of reorganization’, preferably written. The transfer of assets must occur according to this plan. The plan must consider the requirements necessary for the reorganization to qualify as a ‘non-recognition of gain’ or tax-free transaction. If 100% of the plan is not in writing, there must be evidence of the companies’ discussions and negotiations.
Some of the general tax consequences of an international tax-free reorganization are:
* The acquiring company recognizes no gain or loss if it receives money or any other property from the target company. This is as long as it transfers stock, as consideration, to the targeted company.
* The target company shareholders who exchange their stock for acquiring company’s stock recognize no gain or loss. However, they may receive property or money that doesn’t qualify under a Non-Divisive D transaction.
* The targeted company does not record a gain or loss when they are part of a tax-free reorganization. If they exchange property solely for stock or securities, they don’t pay tax. Of course, they have to follow the ‘plan of reorganization’ with all its adherents to the IRC stipulations.
If the target receives something other than stock or securities, they still record no gain or loss. This is only if they distribute this ‘other’ to their shareholders according to the plan of reorganization.
Again, this other property must meet IRC definitions to qualify for a Non-Divisive D transaction. If it doesn’t, there may be tax implications.
There are many elements for a multinational corporation to consider when reorganizing. In today’s regulated business environment, financial acumen, and wise planning will ensure a smooth reorganization process.
Mr. Stransky is a partner in the Boston law firm of Sullivan & Worcester LLP. He specializes in international tax planning for U.S. companies with foreign investments. He can be reached at dstransky@sandw.com or you can find further information at www.sandw.comprofessionals-277.html.
Previous Articles Highlighter:
How To Sponsor Downline Without Cold Calling Leads (1)
Or you may be a subscriber of a newsletter. Somehow, a publisher publishes my article and now you are reading it. The method I am using here is article marketing.
What To Give For A First Wedding Anniversary Gift (2)
Finding a suitable wedding anniversary gift need not be hard, remember the real reason you are buying this gift is to celebrate and show your partner or love done that you love them and have enjoyed the first year together.
The Great Deals On Offer With Car Leasing (3)
Topics: car, leasing, hire, contract, hiring, vehicle Car leasing is a great option for you if you want an up to date car without the anxiety of maintenance costs or the loss of money involved in depreciation.
Playing Old Games With Modern Devices (4)
Modern programming devices are in use mainly to recreate old games and to act as an excellent for games emulation, whereas the programming devices used in arcade machines in the eighties were merely to act as a solution to minor graphical issues.
Success Coach Asks: Why Are You Ignoring These Potential Clients? (5)
The program added intensive, highly-personal value for the women entrepreneurs who took advantage of the program. Platinum programs are incredibly fun to offer because you get to work in-depth with clients who are highly invested in taking action.
Duplicate Content Checker: What It Is And Why You Want One (6)
This, however, was considered to be a manipulation of the search engine algorithms, and so after much brainstorming and improvement Google and other big search engines introduced the "duplicate content penalty" which punished the ranking of pages that appear in many different places, along with any pages that they link to.
Rhinoplasty Stories - They'll Make Or Brake Your Decision (7)
Yes, he was still sleeping, and was a tad bruised, but he had a brand new mouth and the nose was completely reconstructed. They even put a little stint in the nose to ensure that he could breathe out of his nose while in recovery!
Save Hours Every Week By Using A Duplicate Content Checker (8)
It goes without saying that this is undesirable, because even if somebody were to search for the exact title of your article then they would be directed to your competitor's website instead of your own.
Educating Children Through Day Care Programs (9)
By the end of the first year in a day care training program, many children will learn how to write the entire alphabet. Young children get excited about going to day care these days.
Water Storage Will Save Your Life Better Than Food (10)
Topics: water storage, survival kits Did you know that it is more important to store clean water in case of an emergency than it is to store food? There are many reasons for this fact, but the first may or may not be obvious to you.
Newer Articles Highlighter:
The Happy Birthday Digg Effect (1)
Therefore, they kind of just 'tag along' and send their birthday wishes as well. This poses an interesting situation much like Digg. If one or two people remember your birthday and posts on your wall, then your birthday gains attention and you get a whole bunch more posts.
Marketing Need Not Be Expensive (2)
You may think you talk about your business a lot but do you? Most likely you dont talk about it as much as you think about it. Thinking wont get you anywhere.
Subaru Shopping: Getting The Stats On The Top Three (3)
This format has shown great torque readings with less noise. The Forester is a SUV model that doesn't really look like the square shaped archetype of the traditional SUV.
Having All You Want In Business Is Critical Of Joy (4)
There are some times when people really want to be happy but they believe that happiness is all a matter of getting everything that you need. In reality, it is very hard to be happy when you have everything that you want.
Choices, Choices-The IT Course Dilemma (5)
It may help to study a basic course to get yourself familiar with what you are doing. It helps also to find out which career paths are the most competitive and demanding role.
Negotiating A Short Sale With Your Lender (6)
Make sure you talk to the supervisor in the lending company. Stay away from any underlings, as this can not only slow the process, but end up giving you mixed information.
Car Tax Evasion That We All Pay For (7)
For the small amount they would have to pay in vehicle excise duty, it tops up the road tax and car insurance premiums for the rest of us, putting more pressure on those who are trying to stay within the law.
How Can An Ezine Help Your Business? (8)
You can look for some other website offering the same services or products that you offer. You can then call them up and ask if they would add your newsletter to their opt-in form.
The Ins And Outs Of Web Service Hosting (9)
An old school text editor which you had to hand code line for line. Thankfully we've evolved, though some of us have more than others. So let's say you have a desktop publishing package your comfortable working with and want to handle building your site offline before posting it for the entire world to see?
Using A Recruitment Agency; The Fastrack To Employment? (10)
The ability to access job information and receive job updates cannot be underestimated, also accessing the site regularly and keeping up a barrage of emails will increase chances of success.