Corporate reorganization involving foreign subsidiaries, foreign holding company

Corporate reorganization involving foreign subsidiariea

The IRS today released an advance version of Rev. Rul. 2015-09 which provides that the following transaction is properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary’s stock in an exchange governed by section 351 followed by reorganizations under section 368(a)(1)(D):

Related content

  • A domestic corporation transfers all of the stock of its foreign operating subsidiary to its foreign holding company subsidiary in exchange for additional stock;
  • The foreign operating subsidiary and three foreign subsidiaries of the foreign holding company transfer substantially all of their assets to a newly formed foreign subsidiary of the foreign holding company in exchange for stock of the new subsidiary; and
  • The subsidiaries that transfer their assets are liquidated.

With today’s revenue ruling, the IRS has revoked Rev. Rul. 78-130.

Rev. Rul. 2015-09 [PDF 41 KB] states that the IRS will apply this guidance prospectively, and will not apply it to challenge a position taken by a taxpayer that reasonably relied on the conclusions in Rev. Rul. 78-130 prior to May 5, 2015, with respect to a transaction that occurred on or before May 5, 2015, or a transaction that is effected pursuant to a written agreement that is binding on May 5, 2015, and later until the date when the transaction is completed (provided that all parties treat the transaction consistently for federal income tax purposes).

Background

The facts presented in Rev. Rul. 2015-09 are as follows:

P, a domestic corporation, owns all of the stock of S-1 and S-2, both of which are incorporated in foreign country R. S-1 is an operating company. S-2 is a holding company that owns all of the stock of X, Y, and Z, which are operating companies incorporated in foreign country R.

All of the operating companies in country R are to be combined into a new subsidiary of S-2 to be formed in country R in accordance with the following plan:

  • S-2 will organize N corporation, in foreign country R, solely for the purpose of participating in the proposed transaction.
  • P will then transfer all of the stock of S-1 to S-2 in exchange for additional shares of voting common stock of S-2 (P’s transfer).
  • Immediately after P's transfer, X, Y, and Z, as well as S-1, will transfer substantially all of their assets (subject to liabilities) to N, in exchange for additional shares of common stock of N (X, Y, and Z’s transfers and S-1’s transfer).
  • X, Y, and Z, and S-1 will liquidate and distribute all of their N stock to S-2 (X, Y, and Z’sliquidations and S-1’s liquidation).

Following the transaction, N will continue to conduct the businesses formerly conducted by S-1, X,Y, and Z.

To avoid recognizing gain under section 367(a)(1) and Reg. section 1.367(a)-3(a) on the transfer of the S-1 stock to S-2, P will properly enter into a gain recognition agreement pursuant to Reg. section 1.367(a)-8 with respect to that transfer and will satisfy the applicable exceptions to triggering events resulting from the other exchanges that occur in the transaction.

P will also take into account the application of Reg. section 1.367(b)-4, which may require shareholders that exchange stock of a foreign corporation in certain nonrecognition exchanges (including sections 351 and 354) to include in income as a deemed dividend the section 1248 amount attributable to the exchanged stock.

Issue presented

The question presented is whether a transaction when:

  • A domestic corporation transfers all of the stock of its foreign operating subsidiary to its foreign holding company subsidiary in exchange for additional stock;
  • The foreign operating subsidiary and three foreign subsidiaries of the foreign holding company transfer substantially all of their assets to a newly formed foreign subsidiary of the foreign holding company in exchange for stock of the new subsidiary; and
  • The subsidiaries that transfer their assets are liquidated,

is a transaction properly treated for federal income tax purposes as a transfer of the foreign operating subsidiary’s stock in an exchange governed by section 351 followed by reorganizations under section 368(a)(1)(D)?

IRS ruling

Noting that a transfer of property may be respected as a section 351 exchange even if it is followed by subsequent transfers of the property as part of a prearranged, integrated plan, Rev. Rul. 2015-09 explains that a transfer of property in an exchange otherwise described in section 351 will not qualify as a section 351 exchange if, for example, a different treatment is warranted to reflect the substance of the transaction as a whole.

The IRS continued by explaining that under the facts of this revenue ruling, P’s transfer satisfies the formal requirements of section 351, including the requirement that P control S-2 within the meaning of section 368(c) immediately after the exchange.

Moreover, even though P’s transfer and S-1’s transfer and liquidation are steps in a prearranged, integrated plan that has as its objective the consolidation of S-1 and the other operating companies in N, an analysis of the transaction as a whole does not dictate that P’s transfer be treated other than in accordance with its form in order to reflect the substance of the transaction.The IRS therefore concluded that:

The IRS therefore concluded that:

  • P’s transfer is respected as a section 351 exchange, and no gain or loss is recognized by P on the transfer of all of the stock of S-1 to S-2.
  • S-1’s transfer followed by S-1’s liquidation is a reorganization under section 368(a)(1)(D).
  • X, Y, and Z’s transfers followed by X, Y, and Z’s liquidations are also reorganizations under section 368(a)(1)(D).

KPMG observation

The facts of the ruling are identical to those of Rev. Rul. 78-130, which treats P’s transfer of the stock of S-1 to S-2, followed by S-1’s transfer of substantially all its assets to N as a reorganization under section 368(a)(1)(C). The IRS reasoned that such a recast of form was proper because the two planned steps are not to be viewed independently. In revoking Rev. Rul. 78-130, the IRS viewed the form of the transaction as a whole, as no longer dictating a recast to reflect substance.

As noted above, the IRS stated that it will not apply Rev. Rul. 2015-09 to challenge a position taken by a taxpayer that reasonably relied on the conclusions of Rev. Rul. 78-130 prior to May 5, 2015, with respect to a transaction that occurs on or before today, May 5, or to a transaction that is effected pursuant to a written agreement that is binding on May 5, 2015, provided none of the affected corporate parties treats the transaction inconsistently for federal income tax purposes.

© 2016 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us

 

Request for proposal

 

Submit

KPMG's new digital platform

KPMG's new digital platform