Recent letter ruling aids foreign joint venture.

• Author: Zink, Bill
• Position: IRS letter ruling

U.S. companies continue forming strategic alliances to gain access to new markets and achieve cost savings. It should be noted that joint ventures with foreign companies contain potential traps.

Under pre-Taxpayer Relief Act of 1997 (TRA '97) rules, Sec. 1441 applied a 35% excise tax to the gain inherent in property transferred to a foreign partnership. A taxpayer could elect to treat the transfer as a sale or exchange subject to income tax rather than the excise tax.

Under the TRA '97, the 35% excise tax has been repealed. Now, under Sec. 367, a transfer to a foreign partnership will be treated as a sale or exchange equal to the fair market value of the transferred property; thus, the transferor must recognize gain. This revision was effective for transfers occurring after Aug. 5, 1997.

Despite the legislative changes, U.S. companies will continue to form international joint ventures. The IRS recently issued Letter Ruling 9741037, which may be important to U.S.-based taxpayers forming joint ventures with foreign-based companies.

Although the ruling deals with transfers to a foreign partnership under the pre-TRA '97 rules, the ruling is equally applicable under the TRA '97 amendments.

The ruling deals with a domestic and foreign group forming a joint venture under the following steps:

1. Domestic joint venture partner's organization structure:

   [ILLUSTRATION OMITTED]

2. The Foreign joint venture partner's organization structure:

   [ILLUSTRATION OMITTED]

   The U.S. Parent and FP have agreed to combine their respective B operations into a worldwide joint venture to develop, manufacture and market B products. The combination proceeded along the following steps:

1. The subsidiaries of the foreign joint venture partner organized of a foreign joint venture.

   [ILLUSTRATION OMITTED] 2. JV Foreign is set up as a Delaware limited liability company (LLC), changes its name to JV...