Acquisition Taxation: Foreign Corporate Buyers

Per IRC § 367

Statute provides that if buyer is a foreign corporation("Foreign")

• Receipt of Foreign stock by Target shareholders
• Even though incident to a reorganization
• Will be a taxable exchange,
  unless provided otherwise in regulations

IRS regulations (1996) so provide,
if Target meets specified reporting requirements,
and:

• No more than 50% of all of Foreign's outstanding stock is received by US transferors in the transaction;
• No more than 50% of all of Foreign's outstanding stock is owned following the transaction by US persons that were Target officers, directors or 5%-shareholders of Target;
• No US shareholder becomes a 5%-shareholder of Foreign, unless such shareholder enters into a gain recognition agreement;
• and Foreign
  (i) is engaged in an active trade or business outside the U.S., either directly or through certain subsidiaries, during the entire 36-month period ending with the date of the transaction,
  (ii) has no intent to dispose of such trade or business at the time of the transaction, and
  (iii) has a fair market value at least equal to the fair market value of Target

50% / 5% thresholds:

SEC_CODE_REF_0090001192884

• After the acquisition, Target shareholders are subject to reporting requirements
• 5%-shareholders are subject to penalties for failure to make these reports
• A gain recognition agreement requires the former Target shareholder to retroactively report the receipt of Foreign stock as taxable, if prior to the close of the fifth taxable year after transfer, Foreign directly or indirectly disposes of Target stock

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