Transcript www.ofii.org

U.S. Inbound Pre- and PostAcquisition Planning: Issues
and Considerations
May 2008
James R. Barry
Ronald Bordeaux
Mayer Brown LLP
PricewaterhouseCoopers
Chicago, IL
Washington, DC
This document was not intended or written to be used, and it cannot be used, for the
purpose of avoiding U.S. federal, state or local tax penalties.
2008 OFII Tax Conference
La Quinta, CA
1
Introduction and Overview
• Pre-Acquisition Planning
– Stock vs. Asset Acquisition
– Financing the Acquisition
– Repatriation Strategies
– U.S. Grouping
• Post-Acquisition Planning
– Post-Deal Integration
– CFC Restructuring
– Post-Acquisition Planning for Intangibles
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2
Stock v. Asset Acquisitions
Selected Topics
•
•
•
•
•
Section 338 Elections
Section 338 Consistency Rules
Section 7874
– What is “substantial activity” under IRC Sec. 7874?
Can Assets or Shares of the U.S. subsidiary be acquired separately from
the foreign target?
Decontrol Transactions
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Stock v. Asset Acquisitions
Section 338 Elections
•
Section 338 permits corporate purchasers of 80% or more of the stock of a
target corporation (a “qualified stock purchase”) to elect to treat the
transaction as if assets were purchased instead of stock.
– Benefits of election.
– Other means to get basis increase – check the box election.
• Special International Issues.
– Seller of foreign target treated as shareholder at end of acquisition date.
Thus, shareholders of foreign target must take into account the
consequences of deemed sale.
• Increased E&P for section 1248 purposes, Potential subpart F
income, Income under PFIC rules.
– Treatment of deemed sale for foreign tax credit purposes. Generally do
not determine source and character by virtue of deemed sale.
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Stock v. Asset Acquisitions
Section 338 Consistency Rules
•
•
Affects benefits of purchasing subsidiaries or assets separately.
Application of consistency rules.
– If apply, get carryover basis in asset purchased.
– If target affiliate of domestic corporation seller is a CFC and buy asset
where gain would be reflected in CFC stock basis, then purchaser gets
carryover basis in purchased asset.
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Stock v. Asset Acquisitions
Section 7874
•
•
•
Section 7874. Rules Relating to Expatriated Entities and Their Foreign
Parents.
Section 7874 was intended to negate the effect of certain "inversion"
transactions also results in encompassing many unintended “non-inversion”
transactions, such as:
– internal restructuring transactions entered into by publicly traded foreign
multinational corporations, or
– joint ventures entered into by publicly traded foreign multinational
corporations.
In both instances, there exists absolutely no U.S. nexus except that a U.S.
target corporation is being acquired in a tax-free exchange.
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Stock v. Asset Acquisitions
Section 7874, continued
•
Key Issues
– Acquisitions of larger U.S. companies by foreign companies.
• Can inadvertently trigger section 7874.
– Definitions
• “Substantially All The Properties.”
• “Substantial Business Activities.”
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Assets Acquired Separately
•
•
Potential Benefits
– Increased basis.
– Avoid post acquisition restructuring.
Issues
– Section 338 Consistency rules.
– Staged Acquisitions.
• US day one, foreign parent day two.
– Section 304?
– Respect Steps?
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Decontrol Transactions
•
•
Interest Expense Allocation – breaks
affiliated group.
Section 904(j).
– Applies if two or more domestic
corporations would be members
of the same affiliated group if (1)
1504(b) were applied without
exceptions (e.g., foreign
corporations and 936 corporations
and (2) the section 1563
attribution rules applied.
– Avoid by setting up on day one
because not deconsolidating?
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Foreign
Person
Domestic
Corp
21%
79%
Domestic
Corp
La Quinta, CA
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Decontrol Transactions, continued
•
•
Preferred Stock Freezes (see
diagram)
Redemptions
Foreign
Person
Common
Stock 21%
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Domestic
Corp
Domestic
Corp
Preferred
Stock 79%
La Quinta, CA
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Financing the Acquisition
•
•
•
•
Tax efficient financing structures.
Considerations include:
– Debt-Equity,
– Treaty qualification,
– Anti-conduit rules,
– Section 163(j) Issues,
– Integration of public borrowing into the overall financing structure.
Multiple country financing structures.
IRS audit activity.
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La Quinta, CA
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Financing the Acquisition
Tax Efficient Financing Structures
•
Third-Party Borrowing
– DGP Structure (e.g., Australia, Germany, Luxembourg), or Canadian
“Tower” Structure (subject to impact of pending protocol to the U.S.Canada Treaty, to take effect no earlier than 1/1/2010, and Canadian
restricted interest proposal).
• Consider U.S. earnings stripping and foreign thin capitalization
requirements.
• Consider domestic reverse hybrid rules.
• Consider foreign exchange implications.
– Swiss structure.
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Financing the Acquisition
Tax Efficient Financing Structures
•
Related-Party Borrowing.
– Sale and repurchase (“repo”) transactions (e.g., Germany, Luxembourg,
France, Australia).
– Disregarded loan structures (e.g., Germany, UK).
• Consider UK anti-arbitrage rules, and U.S. DCL rules.
– Notional interest deduction structures (e.g., Belgium, Switzerland).
• Ruling may be needed in foreign jurisdiction.
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Financing the Acquisition
Conduit Issues
•
•
•
•
•
Intermediate party withholding,
Public debt,
Portfolio Interest Exception,
Bank syndicate loans.
Treasury Center / Cash Pooling.
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US Groupings
Section 163(j) Proposed Regulations
•
•
•
•
“Cherry picking” with respect to Section 163(j) proposed regulations.
The Service is not permitted to take positions inconsistent with proposed
regulations if there are no final or temporary regulations that are currently
applicable to the particular matter.
Guidance indicates taxpayers need not follow positions in the proposed
regulations.
Issues related to multiple affiliated groups.
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Financing the Acquisition
Third Party Debt
• Potential issue under Section 956 by
reason of the CFCs serving indirectly as
security for U.S. borrowing.
• Concept of “remoteness” implicit in
Section 956.
– Little direct guidance.
• Difference between general financial
guarantee and handing over stock.
Foreign
Parent
US Sub
Third Party
Loan with
Guarantee by
Foreign
Parent
CFCs
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La Quinta, CA
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Financing the Acquisition
IRS Audit Issues
• Continued focus on hybrid securities.
– Sale and Repurchase (“Repo”) transactions.
• Currently a Tier 1 issue.
– We are not aware of any adverse adjustments.
• Purchase price allocation.
– Company purchased a company with U.S. and foreign assets.
• IRS is disputing the purchase price allocation, asserting that the
taxpayer allocated too much to the U.S. group.
• Calls into question third party agreed-upon purchase price
allocations.
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Repatriation Strategies
•
•
•
Modeling cash repatriation for alternative structures.
U.S. and foreign withholding taxes.
Distribution of a note or cash.
–
–
–
–
Respected as valid debt.
Withholding taxes.
E&P analysis.
Potential codification of economic substance.
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Repatriation Strategies
Reverse Hybrid Structure
Considerations
• HCo is a flow through entity for foreign
tax purposes and a corporation for U.S.
tax purposes.
• OpCo Sub loans cash to HCo.
• OpCo Sub can claim an interest
deduction on the interest payments on
the Loan. There may be U.S.
withholding tax on the payments.
• Potentially no Subpart F inclusion under
the same-country exception.
Parent Co
USCo
OpCo Sub
(non-U.S.)
SPV
(U.S.)
Loan
HCo
(non-US)
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U.S. Groupings
Selected Topics
•
Consideration of whether it is more advantageous to have multiple U.S.
consolidated return groups. Consider impact on:
– foreign tax credit,
– Section 163(j) calculations,
– debt-equity implications.
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Post-Acquisition Planning
•
Material tax issues to consider after the completion of the acquisition of a
U.S. target group by a non-U.S. based acquirer.
– Post-deal integration,
– CFC restructuring,
– Post-acquisition planning for location and ownership of intangibles.
– Financing.
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Post-Acquisition Planning
Post-Deal Integration
•
Integration of the U.S. target operations with the operations of the non-U.S.
acquirer, including:
– New non-U.S. holding companies and mergers.
• Simplify and integrate the organizational structure, facilitate cash
repatriation.
• Whether U.S. target might receive a preferred interest in a new
holding company.
• Foreign tax credit implications, potential check-the-box planning.
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Post-Deal Integration
Cash “D” Reorganization
Considerations
• Merges U.S. target with existing U.S.
group.
• Business purpose.
• Other reorganization requirements.
• Basis implications.
• Treaty implications.
Foreign
Parent
Cash
US OpCo1
US OpCo2
2008 OFII Tax Conference
Step 1 - US OpCo1
shares and cash for
all of US OpCo2
assets
US OpCo2
Step 2 – Deemed or
actual liquidation of
US OpCo2
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CFC Restructuring
Preferred Share Structure
Steps
1. US transfers CFC to FC in exchange for
preferred stock of FC.
2. Disregarded entity election made for CFC.
Considerations
•
Preferred stock cannot be non-qualified
preferred stock
•
Annual dividend based on FMV of CFC at the
time of the transfer
•
CFC status may remain based on value.
– If not, US must include Sec. 1248 amount
in income.
•
US must own at least 10% of FC for foreign tax
credit purposes
•
Other possibilities: hyped foreign tax credits,
selectively bring up dividends, financing (highlow planning).
2008 OFII Tax Conference
Foreign
Parent
Preferred
stock
FC
(non-U.S.)
CFC
(non-U.S.)
1
2
US
CFC
(non-U.S.)
La Quinta, CA
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CFC Restructuring
Section 304(a)(1) – Version 1
Steps
1. (A) Foreign Parent transfers non-CFC foreign
assets, and USS transfers CFC assets to a
new foreign holding company (New FHC),
which might or might not be a CFC. (B) CFC
and non-CFC elect to be treated as
disregarded for U.S. federal tax purposes.
Foreign
Parent
A
FSub
CFC
B
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A
USS
New FHC
CFC
FSub
La Quinta, CA
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B
CFC Restructuring
Section 304(a)(1) – Version 1, continued
Steps
2. Foreign Parent sells its interest in New FHC
to a foreign affiliate (FA) for cash or a note.
Considerations
• Business purpose.
• Long-term tax efficiency.
• U.S. withholding tax.
• Foreign tax.
• Subpart F.
• Fast pay regulations.
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Foreign
Parent
FA
USS
New FHC
CFC
FSub
La Quinta, CA
26
CFC Restructuring
Section 304(a)(1) – Version 2
Steps
1. Foreign Sub2 purchases US NewCo from
an unrelated party. A valid Section 338
election is made with respect to US
NewCo.
2. CFC elects to be treated as disregarded
for U.S. federal income tax purposes.
3. Foreign Sub1 transfers CFC to Foreign
Sub2 in exchange for US NewCo.
Foreign
Parent
Foreign
Sub2
USCo
3
3
Foreign
Sub1
US
NewCo
CFC
1
CFC
(non-U.S.)
US
NewCo
2
3
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CFC Restructuring
Section 304(a)(1), Version 2 - continued
Considerations
• Steps 2 and 3 (check the box election and
sale of CFC to Foreign Sub2) are
expected to be a sale of assets. See
Dover v. Comm., 122 T.C. 324 (2004).
• No subpart F income expected if assets
are business assets for Sec. 954(c).
• Section 304(a)(1) applies to the Step 3
transfer. The transfer of CFC to Foreign
Sub2 is treated as a dividend to Foreign
Sub2, first from Foreign Sub1 to the extent
of its E&P, and then from US NewCo to the
extent of its E&P.
• Business purpose, fast-pay regulations,
subpart F, U.S. withholding tax, foreign tax,
long-term tax efficiency.
2008 OFII Tax Conference
Foreign
Parent
USCo
Foreign
Sub2
Foreign
Sub1
Former
CFC
US
NewCo
La Quinta, CA
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CFC Restructuring
Section 304(a)(2)
Steps
1. USCo forms Foreign Sub. Foreign Sub issues
common stock to USCo.
2. USCo transfers common shares of CFC to
Foreign Sub in exchange for common shares
of Foreign Sub.
3. CFC elects to be disregarded.
4. Foreign Sub transfers all of the common
shares of CFC to Foreign Parent in exchange
for common shares of USCo.
Foreign
Parent
4
USCo
Foreign
Sub
1
CFC
2
CFC
4
CFC
3
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CFC Restructuring
Section 304(a)(2), continued
Considerations
• The transfer in Step 4 is recharacterized
under Sec. 304 as a distribution by Foreign
Sub to Foreign Parent in redemption of
USCo’s stock.
– Foreign Sub recognizes gain / realizes
loss, if any.
– Foreign Parent is treated as receiving a
Sec. 301 distribution (FMV of CFC).
• Business purpose is required.
• Foreign tax consequences.
• Long-term implications.
• Subpart F considerations.
• OFL recapture rules.
• Fast-pay regulations.
• Withholding tax considerations.
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Foreign
Parent
USCo
Former
CFC
Foreign
Sub
La Quinta, CA
30
CFC Restructuring
Share Contribution with Redemption
Steps
1. Foreign Parent transfers Foreign Sub
shares to CFC in exchange for CFC
common shares.
2. Foreign Sub liquidates / elects to be
treated as disregarded for U.S. federal
income tax purposes (a deemed
liquidation).
3. CFC redeems its shares held by US Sub.
Considerations
• Business purpose required.
• May be able to freeze the value of the
CFC stock held by US Sub.
• Fast pay, FTCs, Sec. 861 allocations, E&P.
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Foreign
Parent
US Sub
(U.S.)
Step 3 – Share
Redemption
CFC
Foreign
Sub
Foreign
Sub
Step 1 –
Foreign Sub
shares for CFC
shares
Step 2 –
Deemed
Liquidation
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CFC Restructuring
Steps
• Foreign Parent and CFC form a Foreign Partnership, and each contributes
business in exchange for a common (FP) and preferred partnership interest
(CFC).
Considerations
• Special allocations - allocate higher taxed E&P to CFC to facilitate FTC
recovery.
• Consider special allocation of Subpart F income to Foreign Parent.
• Consider allocation of R&D deductions to CFC.
• No special constraints under Sec. 367 or the partnership rules because
under Sec. 704(c) the pre-contribution gain is taxed back to the contributor.
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Post-Acquisition Planning for
Intangibles
•
•
•
Integration with non-U.S. entrepreneur structures.
Transfer of IP out of the United States.
Use of foreign partnerships for holding IP.
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Offshore IP
Foreign
Parent
Steps
1. Foreign Parent and USCo form a
Foreign Partnership (“FP”).
2. Foreign Parent contributes $5M cash
and a promise to contribute another
$50M at a future time in exchange for a
55% interest in the FP.
3. U.S. transfers worldwide IP rights to FP
in exchange for a 45% interest in FP
valued at $45M.
4. FP funds the development of IP rights.
2
USCo
3
45%
55%
CFC
1
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Foreign
Partnership
La Quinta, CA
34
Offshore IP
Considerations, continued
• Business purpose required.
• Consider whether contribution would
qualify for Section 721 tax-free
treatment.
• Section 367 not expected to apply.
• Section 482 likely applies to the
valuation of initial contributions to FP
and to the ongoing allocations.
• Consider how Section 704(c) special
allocation rules would apply.
• Consider whether R&D costs would
qualify for Section 174 treatment.
2008 OFII Tax Conference
Foreign
Parent
USCo
45%
55%
CFC
Foreign
Partnership
La Quinta, CA
35