TAX STRATEGIES                                                                    TAX STRATEGIES              CROSS-BORDER...
OVERVIEW OF TRANSACTIONS• Domestic Transactions   – Type A – Merger   – Type B – Stock for Stock   – Type C – Stock for As...
TYPE A REORGANIZATIONSIRC §368(a)(1)(A) STATUTORY MERGER / CONSOLIDATION              Shareholders                        ...
TYPE B REORGANIZATIONS             IRC §368(a)(1)(B) STOCK FOR STOCK                                   Acquiror Stock     ...
TYPE C REORGANIZATIONS               IRC §368(a)(1)(C) STOCK FOR ASSETS              Shareholders                         ...
TYPE D REORGANIZATIONS    IRC §§355, 368(a)(1)(D) DIVISIVE REORGANIZATION                                          Shareho...
TYPE D REORGANIZATIONSIRC §§354, 356, 368(a)(1)(D) NON-DIVISIVE REORGS.                    Merger   Shareholders          ...
TRIANGULAR / SUBSIDIARY MERGERS    FORWARD AND REVERSE TRIANGULAR MERGERS     Forward Triangular Merger                   ...
IRC §367(a)                     OUTBOUND TRANSACTIONS• If a US target transfers property to foreign acquiror pursuant to a...
IRC §367(b)  INBOUND AND FOREIGN TO FOREIGN TRANSACTIONS• Inclusion of All E&P Amount in domestication transactions    – 1...
IRC §1248                      SUBPART F INCOME• Seller of Controlled Foreign Corporation (CFC) must  treat as dividend ga...
IRC §367             JOINT VENTURE STRUCTURES                                         • Disguised SaleUS Company          ...
IRC §7874                         ANTI-INVERSION RULES• The IRS may tax outbound reorganization and/or tax foreign acquiro...
IRC §338(g) STOCK PURCHASE AS ASSET ACQUISITION ELECTION• The US acquiror of a foreign-  owned, foreign target may make a ...
ADDITIONAL RESOURCES   www.RoyseUniversity.com   Providing business, tax, and personal finance ideas to   founders and exe...
PALO ALTO              LOS ANGELES             SAN FRANCISCO1717 Embarcadero Road   1150 Santa Monica Blvd.       135 Main...
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CA State Bar International

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2012 Annual Meeting of the California Tax Bar & California Tax Policy Conference Nov. 3, 2012

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CA State Bar International

  1. 1. TAX STRATEGIES TAX STRATEGIES CROSS-BORDER M&A AND REORGANIZATIONS CROSS-BORDER M&A AND REORGANIZATIONS Roger Royse Royse Law Firm, PC Palo Alto, San Francisco, Los Angeles rroyse@rroyselaw.com www.rroyselaw.com www.rogerroyse.com Skype: roger.royse 2012 Annual Meeting Twitter: Rroyse00 of the California Tax Bar & California Tax Policy Conference Nov. 3, 2012IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in thiscommunication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) 1avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.
  2. 2. OVERVIEW OF TRANSACTIONS• Domestic Transactions – Type A – Merger – Type B – Stock for Stock – Type C – Stock for Assets – Type D – Spin Off, Split Off, Split Up, and Type D Acquisitive Reorganizations – Triangular Mergers• Foreign Transactions – §367(a) – Outbound Transactions – §367(b) – Inbound and Foreign to Foreign Transactions – §7874 – Anti-Inversion Rules – §338(g) Election• Joint Ventures 2
  3. 3. TYPE A REORGANIZATIONSIRC §368(a)(1)(A) STATUTORY MERGER / CONSOLIDATION Shareholders Acquiror Stock; Boot Target Acquiror Target Assets; Merger • Statutory Merger: Two or more • International A reorganizations corporations combine and only are possible for transactions after one survives (Rev. Rul. 2000-5) Jan. 23, 2006. Reg. § 1.368- 2(b)(1)(ii). 3
  4. 4. TYPE B REORGANIZATIONS IRC §368(a)(1)(B) STOCK FOR STOCK Acquiror Stock Shareholders Acquiror Target Stock (Control) Target• Acquiror receives Target stock, resulting in control of Target, in exchange for Acquiror voting stock. 4
  5. 5. TYPE C REORGANIZATIONS IRC §368(a)(1)(C) STOCK FOR ASSETS Shareholders Liquidation Acquiror Stock; Boot Target Acquiror Target Assets• Acquiror receives substantially • Up to 20% of the consideration all of Target’s assets in exchange for Targets assets can be for Acquiror voting stock. property other than Acquiror – 70% of Target’s gross assets. voting stock (“boot”), but if any – 90% of Target’s net assets. such boot exists, then any liabilities assumed by Acquiror• Reorganization Expenses are also treated as boot. 5
  6. 6. TYPE D REORGANIZATIONS IRC §§355, 368(a)(1)(D) DIVISIVE REORGANIZATION Shareholders T1, T2 Stock T1 Stock; Control T2 Stock; Control T1 Transferor T2 Assets Assets• Active Business Requirement• “Spin Off”; “Split Off”; “Split Up” 6
  7. 7. TYPE D REORGANIZATIONSIRC §§354, 356, 368(a)(1)(D) NON-DIVISIVE REORGS. Merger Shareholders T’ee Stock 20% T’ee Stock Transferor Transferee T’or Assets; Merger Failed Type C Liquidation and Reincorporation T’ee Stock Shareholders Shareholders Transferee Liquid T’or Assets Cash; T’ee Stock ate Cash; T’ee Stock Transferor Transferee Transferor T’or Assets 7
  8. 8. TRIANGULAR / SUBSIDIARY MERGERS FORWARD AND REVERSE TRIANGULAR MERGERS Forward Triangular Merger Reverse Triangular MergerShareholders Shareholders P Stock P Stock P P 80% 80% T Merger S T Merger S Sub Survives Target Survives Key: T = Target P = Acquiror S = Merger Sub 8
  9. 9. IRC §367(a) OUTBOUND TRANSACTIONS• If a US target transfers property to foreign acquiror pursuant to a tax-free provision (e.g., Sections 332, 351, 354, 356, or 361),• Then the foreign acquiror shall not be treated as a corporation (i.e., would not qualify for tax-free provisions), and gain would generally be recognized.• Exception if all of the following are met: 1. No more than 50% of foreign acquiror stock is received by US target, 2. No more than 50% of foreign acquiror stock is owned after the transfer by US persons that are officers or directors or by 5% US target shareholders, 3. Any 5% US target shareholders enter into a Gain Recognition Agreement, 4. FMV of foreign acquiror’s assets are at least equal to the FMV of US target, 5. 36 month active trade or business test is met, with no intent to substantially dispose of or discontinue such trade or business, 6. Tax reporting requirements are satisfied. 9
  10. 10. IRC §367(b) INBOUND AND FOREIGN TO FOREIGN TRANSACTIONS• Inclusion of All E&P Amount in domestication transactions – 10% U.S. Shareholder – 10% U.S.-Owned Foreign Corporate Shareholder• Recognition of § 1248 Amount on loss of status as a §1248 Shareholder• §1248 Amount: E&P attributable to stock accumulated in taxable years beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by transferor while foreign corporation was a CFC. – Controlled Foreign Corporation (“CFC”): A foreign entity of which United States shareholders collectively own more than 50% of the voting power or value. A “United States shareholder” is a US person who owns at least 10% of the foreign entity.• §1248 Shareholder: A US person who owns or is considered as owning 10% or more of the total combined voting power of all classes of stock entitled to vote of a CFC at any time during the 5-year period ending on the date of the sale or exchange. 10
  11. 11. IRC §1248 SUBPART F INCOME• Seller of Controlled Foreign Corporation (CFC) must treat as dividend gain to extent of E&P• §1248 inclusion carries foreign tax credits• §1248 amount determined at year end and pro rated based on day count, so post closing events can have an effect on the §1248 amount• Controlled Foreign Corporations (“CFCs”) – A foreign entity is classified as a CFC if it has “United States Shareholders” who collectively own more than 50% of the voting power or value of the company. For the purposes of the CFC rules, a “United States Shareholder” is defined as US persons holding at least a 10% interest in the foreign corporation. 11
  12. 12. IRC §367 JOINT VENTURE STRUCTURES • Disguised SaleUS Company Foreign Issues Company LLC US & Foreign Assets 12
  13. 13. IRC §7874 ANTI-INVERSION RULES• The IRS may tax outbound reorganization and/or tax foreign acquiror as a U.S. taxpayer: – If ownership of former U.S. target shareholders in foreign acquiror is 80% or more then foreign acquiror is treated as a U.S. company – If ownership continuity is between 60 and 80%, then the foreign acquiror is NOT treated as a U.S. company, but U.S. tax attributes cannot be used to offset gains – 20% excise tax on stock-based compensation upon certain corporate inversion transactions.• Exception: – Companies with “substantial business activities” in the foreign jurisdiction; prior facts and circumstances test compares activities of company in foreign jurisdiction with activities of company globally. – New proposed regulations (REG-107889-12, T.D. 9592) require group employees, group assets, and group income located or derived in foreign country of incorporation to equal at least 25% of worldwide group employees, assets, and income. The “group income” definition makes this threshold very difficult in some cases. 13
  14. 14. IRC §338(g) STOCK PURCHASE AS ASSET ACQUISITION ELECTION• The US acquiror of a foreign- owned, foreign target may make a §338(g) election, which steps up basis and eliminates E&P and foreign tax credits.• The target may be able to offset §338(g) gains with net operating losses.• The acquiror of a US target with a foreign subsidiary may make a §338(g) election with regard to both the US target and the foreign subsidiary, triggering deemed sales of the target’s stock in the subsidiary and the subsidiary’s assets and a §1248 dividend. 14
  15. 15. ADDITIONAL RESOURCES www.RoyseUniversity.com Providing business, tax, and personal finance ideas to founders and executives. www.RoyseLink.com Connecting founders with investors. www.rroyselaw.com/ijuris_login_jp.html Offering legal document templates and more. 15
  16. 16. PALO ALTO LOS ANGELES SAN FRANCISCO1717 Embarcadero Road 1150 Santa Monica Blvd. 135 Main Street Palo Alto, CA 94306 Suite 1200 12th Floor Los Angeles, CA 90025 San Francisco, CA 94105 www.rroyselaw.com Twitter: RoyseLaw 16

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