Tax issues for foreign acquisitions: a tax attorney outlines the benefits and challenges of specific tax code treatments involving overseas buyers and sellers.

• Author: Epstein, Stephen J.
• Position: International Taxation

Should you buy assets or stock? Every acquisition of a corporation, even a foreign-owned business, has tax consequences. Stock sales typically generate a single level of tax to shareholders; asset sales generate a step-up in the basis of the acquired assets to reflect the purchase price paid, which generates greater future tax deductions for the buyer.

The key, then, if you are a U.S. corporation planning to buy 80 percent or more of a foreign target company, is to structure that acquisition to realize the best tax advantage.

By enabling the Internal Revenue Code Section 338 election, Congress made it possible to have the best of both worlds by permitting corporations purchasing a controlling interest in another corporation through a qualified stock purchase to elect to have that stock acquisition treated as a purchase of assets. Foreign targets are ineligible for the special Section 338(h)(10) election. They are eligible, however, for a Section 338(g) election -- referred to in this article as "338(g)" -- made by the purchaser.

A 338(g) election often is useful in reducing the ultimate U.S. tax cost when the target's earnings are repatriated or the target is subsequently sold at a gain. Generally, as long as the target is not engaged in a U.S. business, a buyer's 338(g) election for its purchase of the foreign target won't incur any U.S. tax cost. And since the 338(g) election doesn't apply overseas, no foreign taxes are incurred.

To benefit fully, pay attention to filings and compliance. For example, failure to provide timely notice to even one U.S. person required to receive it invalidates the 338(g) election unless the IRS determines that the purchaser made a "good faith" effort to identify and provide timely notice to all required recipients. So, to be absolutely certain, send a notice to all sellers regardless of whether or not they are U.S. persons [taxpayers]. And consider adding a schedule to the purchase agreement in which non-U.S. sellers represent that fact, and also the fact they are not U.S.-owned.

Issues for U.S. Sellers Of a Foreign Target

* Special Target Status. If the foreign target is a Controlled Foreign Corporation, or CFC (more than 50 percent owned by U.S persons, each of whom owns at least 10 percent directly or indirectly), or a Foreign Personal Holding Company (FPHCO), some or all of the deemed asset sale gain could be Subpart F or FPHCO income. That portion of the gain (all of the gain in the case of a FPHCO)...