U.S. companies take "AIM" at the U.K. stock market.

• Author: Verzi, Robert
• Position: Alternative Investment Market

For various business reasons, several U.S. companies have attempted to list their shares on the Alternative Investment Market (AIM) of the London Stock Exchange. The business reasons for listing U.S. company shares on a foreign stock exchange are beyond this item's scope; suffice it to say that the U.S. regulatory environment may have created interest in looking beyond its borders to other capital markets.

The listing of U.S. companies' shares on a foreign stock exchange may fall within the following pattern:

1. The U.S. shareholders transfer their shares of the operating companies to a U.S. holding company (USHoldco) in exchange for USHoldco shares. Such exchange will most likely qualify as tax free under Sec. 351. If so, neither the exchanging shareholders, nor the corporations whose shares are transferred or the transferee holding company, should recognize taxable income. This step is often required to simplify the transfer described in step #2 (below).

2. The shareholders transfer their USHoldco shares for shares in the foreign entity that will be listed on the foreign exchange. In the case of the AIM, the listed entity will be a public limited company (PLC). A PLC is a per se corporation for U.S. income tax purposes under the Sec. 7701 "check-the-box" rules; see Regs. Sec. 301.7701-2(b)(8)(i). 3. Shares of PLC are then offered for sale on the foreign exchange.

Most of the U.S. tax challenges arise in step #2. Two sets of rules may create a whole host of tax concerns for the U.S. shareholders. One set, under Sec. 367(a) and Regs. Sec. 1.367(a)-3(c), deals with the outbound transfer of U.S. corporations to foreign entities. The other rules are a recent creation under the American Jobs Creation Act of 2004--the Sec. 7874 anti-inversion rules.

In light of these two sets of tax rules on outbound transfers of shares, the situation described above presents two main U.S. income tax issues:

* Can the U.S. resident shareholders defer U.S. income tax that may result from the transfer of their ownership in USHoldco for shares in PLC?

* Can the transaction (which will result in PLC being the ultimate parent of the worldwide group) avoid the anti-inversion rules? If the anti-inversion rules apply to the proposed transfer of USHoldco's shares to PLC, PLC may be treated as a U.S. corporation, subject to U.S. income tax on its worldwide income.

Deferral under Sec. 367

It is possible for the U.S. shareholders to defer U.S. income tax on their transfer...