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International Transfers Of Property: The Tax Pitfalls To Look Out For

30 Apr 2013
The Department of Treasury and IRS have issued final regulations concerning transfers of property by a domestic corporation to a foreign corporation. In response to taxpayer comments, certain modifications were made to clarify the application of Section 367(a)(5).

However, other proposed amendments intended to clarify and streamline the regulations were not adopted, leaving a few traps for the unwary. Taxand USA discusses the key updates which could take taxpayers by surprise.

Not subject to corporate-level tax? Keep reading: the section 367(a)(5) regulations could still apply to you
Despite the stated policy that Section 367(a)(5) is intended to preserve corporate-level gains, the Treasury Department and IRS declined to adopt recommendations from commentators to exempt special corporate entities, such as regulated investment companies (RICs), real estate investment trusts (REITs) and S corporations, from the application of Section 367(a)(5). The Government expressed concern that exempting special entities from Section 367(a)(5) may undermine the preservation of corporate-level tax.

Preservation of inside gain requires obliteration of outside stock loss - how could that be?
The Treasury Department and IRS believe that the amount of outside built-in gain or loss should not affect the required basis adjustments of the foreign corporation stock received in the transaction. Therefore, the final regulations require basis adjustments to both built-in gain shares and built-in loss shares. Without proper planning, taxpayers may find themselves in the unpleasant situation of realising (but not recognising) an outside stock loss in the reorganisation but ending up with built-in gain stock.

Discover more: International transfers of property - the tax pitfalls to look out for

Your Taxand contact for further queries is:
Ernesto Perez
T. +1 305 704 6720

Taxand's Take

Under the new regulations, tax-free asset reorganisation treatment may still be available, but such treatment may carry the price of losing a surprising amount of stock basis, and the required computations are complex and burdensome going forward.

Taxand's Take Author