Update on Cross-Border M&A in Corporate/International Taxation

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Devon Bodoh, Partner, Weil, Gotshal & Manges LLP (Moderator)

Layla Asali, Member, Miller & Chevalier Chartered

Timothy Shuman, Partner, McDermott, Will & Emery LLP

Paul Crispino, Attorney-Advisor, Office of Tax Policy, U.S. Department of Treasury

Teisha Ruggiero, Branch Chief, Branch 4, Office of the Associate Chief Counsel (International), Internal Revenue Service

Julie Wang, Senior Counsel, Branch 2, Office of the Associate Chief Counsel (Corporate), Internal Revenue Service

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Government Update

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PTEP and Section 961 Basis:

IRS Notice 2024-16

3

PTEP and Basis

Example – Inbound Section 332 Liquidation

•

Year 1: $100 GILTI inclusion attributable to CFC2 creates $100

PTEP

•

Section 961(a): $100 basis increase in CFC1 stock

•

Section 961(c): $100 basis increase in CFC2 stock 

for purposes of

section 951

•

End of Year 1: CFC1 distributes all assets to USP in a section

332 liquidation

•

Year 2: CFC2 distributes $100 PTEP to USP

•

What is USP’s basis in CFC2 stock after the Year 1 section 332

liquidation of CFC1? Does section 961(c) basis in CFC2 stock

become section 961(a) basis?

•

Does USP recognize gain on distribution of PTEP by CFC2 in Year 2?

•

Similar questions if CFC1 transfers assets to USS in an inbound

F reorganization

4

USP

CFC1

CFC2

$100 PTEP

CFC1

Liquidation

1

$100

Distribution

2

PTEP and Basis

IRS Notice 2024-16 – Regulations to be Issued

•

IRS Notice 2024-16 announces that forthcoming regulations “will

provide that, in the case of a covered inbound transaction, a domestic

acquiring corporation’s adjusted basis of the stock of an acquired CFC

determined under section 334(b) or 362(b) is 

determined as if the

transferor CFC’s section 961(c) basis were adjusted basis

.”

•

Section 961(c) basis must be with respect to the domestic corporation

that acquires the stock of the acquired CFC in a covered inbound

transaction

•

Taxpayers may rely on the rules in Notice 2024-16 “for transactions

completed on or before the date proposed regulations governing the

basis consequences of covered inbound transactions are published…”

•

Comments due February 26, 2024

5

PTEP and Basis

IRS Notice 2024-16 – Covered Inbound Transactions

•

Covered Inbound Transaction

•

Domestic acquiring corporation acquires 

all of the stock of the acquired CFC

from a transferor CFC 

that, immediately before the transaction and any related

transactions, 

owns (directly or indirectly under section 958(a)(2)) all of the stock

of the acquired CFC

, in one of the following transactions:

•

Section 332 liquidation or upstream asset reorganization

 in which all of the stock of the

transferor CFC is owned directly by the domestic acquiring corporation immediately before the

transaction

•

Other asset reorganization

 in which all of the stock of the transferor CFC is owned directly by a

single domestic corporation (or members of the same consolidated group) and the same

domestic corporation directly owns all of the stock of the domestic acquiring corporation

immediately after the transaction and any related transactions

•

Exception for de minimis stock ownership in transferor CFC (≤1 percent)

6

PTEP and Basis

IRS Notice 2024-16 – Limitations

•

Limitations on the Scope of Covered Inbound Transactions

•

De minimis boot.

 Boot is disqualifying, unless it is ≤1 percent of total FMV of stock of transferor CFC

•

Loss in stock of acquired CFC.

 Transaction is not a covered inbound transaction if, immediately

before the inbound transaction, the total amount of the transferor CFC’s basis in the stock of the

acquired CFC (including section 961(c) basis) exceeds the total FMV of such stock

•

Drop downs

. Transaction is not a covered inbound transaction if stock of the acquired CFC is

transferred pursuant to section 368(a)(2)(C) or §1.368-2(k)(1), unless the transferee is (i) a member

of the same consolidated group that includes the domestic acquiring corporation and wholly owned

by members of the consolidated group, or (ii) the common parent of that consolidated group

•

Other subsequent transfers

. Transaction is not a covered inbound transaction if stock of the

acquired CFC is transferred to a partnership or foreign corporation pursuant to a plan in connection

with the inbound transaction (plan deemed to exist within 2-year period)

•

RIC, REIT, S Corp

. Does not apply if the domestic acquiring corporation is one of these entities

•

If stock of multiple acquired CFCs is transferred by a single transferor CFC, these

limitations apply separately with respect to each acquired CFC

7

PTEP and Basis

IRS Notice 2024-16 – Foreign Currency

•

A taxpayer that has maintained section 961(c) basis in a currency

other than the US dollar must, before applying the rules in Notice

2024-16, translate section 961(c) basis into US dollars, under a

reasonable method consistently applied to all acquired CFCs in any

covered inbound transaction undertaken by one or more domestic

acquiring corporations

•

Must use exchange rate that reflects the original US dollar inclusion

amounts of the US shareholder that gave rise to the section 961(c)

basis, reduced as appropriate, including to take into account

distributions of PTEP on such stock

•

Distributions of PTEP are treated as reducing the section 961(c) basis

as so translated by the US dollar basis of the PTEP

8

PLR 202339009 (Public Company “F” Reorganization)

9

PLR 202339009 (Public Company “F” Reorganization)

Transaction Steps:

•

Step 1 – Parent forms Resulting, owning nominal

shares

•

Step 2 – Parent subscribes for additional Resulting

shares for nominal consideration, instructing Resulting to

issues shares to Parent’s shareholders pro rata; nominal

shares canceled

•

Step 3 – Parent sells FSub to Resulting for notes (non-

interest bearing, demand)

•

Step 4 – Shareholders exchange Parent stock for

Resulting stock

•

Step 5 – Resulting shares begin trading

•

Step 6 – Parent files notice to convert under local law

to private limited company (eligible entity); 

a

 days after

the share-for-share exchange, Parent converts

•

Step 7 – Effective on conversion date, Parent checks

the box and becomes disregarded

10

Parent

FSub

Resulting

Resulting Formation

1

3

Sell FSub to

Resulting for

Notes

SHs

Parent

Resulting

FSub

SHs

Resulting

Notes

4

Share-for-Share

Exchange

Parent

Resulting

FSub

SHs

Resulting

Notes

6

7

Parent Converts

and Checks-the-

Box

PLR 202339009 (Public Company “F” Reorganization),

cont’d

Representations:



Step 3 is structured as a sale solely for local country purposes



No planned purchase or sale of Resulting stock between Step 4 and Step 7 will be included in the plan of

reorganization

Rulings:



Steps 2, 3, 4, 6 and 7 will be treated as if 100% of Parent was contributed to Resulting and thereafter Parent

made a check-the-box election



Period of time between Step 4 and Step 7 will not prevent section 368(a)(1)(F) qualification



Sales or exchanges of Resulting stock during the period between Step 4 and Step 7 will not prevent section

368(a)(1)(F) qualification

Issues/Questions:



Treas. Reg. 1.368-2(m)(1)(ii): “The same person or persons must own all of the stock of the transferor

corporation, determined immediately before the potential F reorganization, and of the resulting corporation,

determined immediately after the potential F reorganization, in identical proportions.  However, this

requirement is not violated if one or more holders of stock in the transferor corporation exchange stock in the

transferor corporation for stock of equivalent value in the resulting corporation, but having different terms from

those of the stock in the transferor corporation, or receive a distribution of money or other property from either

the transferor corporation or the resulting corporation, whether or not in exchange for stock in the transferor

corporation or the resulting corporation.”



How significant is the number of days at issue in Step 6 (to effectuate the local country conversion)?



What is the meaning of the second representation that purchases/sales of Resulting stock will not be included

“in the plan of reorganization”?

11

Parent

Resulting

FSub

SHs

Resulting

Notes

Liberty Global v United States

12

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•

Simplified Steps

1.

Belgium DRE converted into a per se corporation w/ debt and

NQPS outstanding

2.

CFC 1 sold CFC 2 upstream to Foreign Parent

•

Intended U.S. Tax Treatment

•

Taxable

 contribution of Belgium assets to new Belgium CFC  under

section 351(b), triggering E&P for CFC 2

•

E&P not taxed as GILTI, because CFC 2 continued to be a CFC due to

the repeal of section 958(b)(4), but had no direct/indirect U.S. SH on

last day of its year

•

CFC 1’s gain on the sale of CFC 2 triggers section 964(e) dividend to

USP, sourced to untaxed E&P

•

Section 964(e) dividend is not Subpart F income by reason of

section 245A DRD

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USP

Belg.

BVBA

CFC2

(1) Conversion

into a Per Se

Corp

Belgium

NV/SA

FP

(2) Upstream

Sale of CFC 2

CFC1

CS, NQPS and Debt

•

Extraordinary reduction rules (Reg. 1.245A-5(e)) deny a section 245A DRD for this type of transaction.

•

But regulations were retroactive and issued on a temporary basis w/o notice and comment.

•

Colorado District Ct concluded lack of notice and comment violated the APA, rejecting the

Government’s argument that it needed to rush the regulations to prevent abuse.

•

IRS then pivots to economic substance arguments

•

IRS attempting to disregard the taxable incorporation transaction (conversion to per se entity), so as to

disregard the resulting E&P, which would convert the stock gain into Sub F income

•

No business purpose/economic significance for the conversion into a per se corporation (along with

issuance of NQPS and notes)

•

Step transaction argument that existence of per se Belgian corporation was transitory

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Section 7701(o) -

•

“In the case of any transaction in which the economic substance doctrine is relevant… 

The determination of

whether the economic substance doctrine is relevant to a transaction shall be made in the same manner as if

[section 7701(o)] had never been enacted.”

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“[T]here is no threshold ‘relevance’ inquiry that precedes the inquiry” into a transaction’s economic substance.

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Instead, “the doctrine’s relevance is coextensive with the statute’s test for economic substance.”

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“The question of whether the [transaction] lacks economic substance is equivalent to the question of whether

the tax benefits achieved in the transaction violate congressional intent and is analyzed using the enumerated

statutory prongs,” i.e., (1) no meaningful change to non-tax economic position, and (2) no substantial purpose

apart from tax effects.

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LGI’s transaction was not a “basic business transaction.”

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“[A] series of transactions that 

constitute

 a corporate organization or reorganization” might fall outside the economic

substance doctrine, but a series of transactions “that merely 

includes

 a reorganization” is not necessarily exempt.

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The proper unit of analysis is “the transaction in aggregate.”

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Court refused to analyze any step or phase in isolation, even if it could be said that the tax benefit at

issue was “created” because of a particular step.

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Prong 1

: No Meaningful Change to LGI’s Economic Position

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LGI conceded that three of the four steps in the transaction did not change its economic position “in a

meaningful way.”

•

Court: That concession controls. Non-tax economic consequences, if not “meaningful,” are insufficient.

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Prong 2

: No Substantial Non-Tax Purpose

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LGI claimed the transaction was “in furtherance” of Belgian corporate law requirements.

•

Court: LGI failed to sufficiently indicate how the transaction facilitated such compliance.

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Court: A transaction may be “in furtherance” of some end without being a “substantial purpose.”

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“[T]he only substantial purpose of the transaction was tax evasion.”

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Proposed Section 367(b) Regulations

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

Treasury and the IRS on October 5 issued proposed regulations (Proposed Regulations) (

REG-

117614-14

) providing guidance on the taxation of cross-border triangular reorganizations and

related transactions.



The Proposed Regulations modify regulations previously announced in Notice 2014-32 and Notice

2016-73. Notice 2014-32 addressed transactions that Treasury viewed as exploiting certain aspects

of final regulations published on May 19, 2011 under Section 367(b) (the 2011 Final Regulations).



Notice 2016-73 contained additional rules to address transactions that Treasury viewed as exploiting

the 2011 Final Regulations, as modified by the rules announced in Notice 2014-32, and announced

that additional regulations would be issued under Section 367.



With respect to the rules described in Notice 2014-32, the Proposed Regulations generally would

apply to transactions completed on or after April 25, 2014, subject to limited exceptions. For the

rules described in Notice 2016-73, the Proposed Regulations generally would apply to transactions

completed on or after December 2, 2016. To the extent the Proposed Regulations contain rules not

previously announced in Notice 2016-73, the Proposed Regulations would be applicable to

transactions completed on or after December 6, 2023, the date the Proposed Regulations are filed in

the Federal Register. Comments were due by December 5, 2023.

Proposed Section 367(b) Regulations

18

Prop. Treas. Reg. § 1.367(b)-3(g)(6), Example 1

Inbound F Reorganization with Excess Asset Basis

Facts

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The F Reorganization is an asset acquisition described in section 368(a)(1) and

is thus subject to section 367(b) and Prop. Treas. Reg. § 1.367(b)-3(g). Under

Prop. Treas. Reg. § 1.367(b)-3(b)(3), USP and USS each must include in income

as a deemed dividend the all E&P amount with respect to their stock of FP.

•

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EAB – The amount of FP’s EAB is $50x, calculated as the amount by which FP’s

inside asset basis ($95x) exceeds: (i) the sum of FP’s E&P ($40x), (ii) the

aggregate basis in the outstanding stock of FP ($5x), and (iii) the amount of

liabilities of FP assumed by US Newco in the F Reorganization ($0).

FP

USP

FS1

USS

FS2

US Newco

Transfer all

FP’s assets

US Newco

stock

80%

FMV = $80x

AB = $4x

E&P = $32x

20%

FMV = $20x

AB = $1x

E&P = $8x

Assets AB = $95x

Liabilities = $0

E&P = $40x

E&P = $30x

E&P = $70x

US Newco

stock

1

1

2

2

US Newco

stock

Prop. Treas. Reg. § 1.367(b)-3(g)(6), Example 1 (continued)

Inbound F Reorganization with Excess Asset Basis

Analysis

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C.

Deemed Distribution of Specified Earnings



The amount of specified earnings equals $50x, the lesser of the

following amounts: (i) $100x, the sum of the E&P of FS1 and FS2; and

(ii) $50x, the amount of EAB with respect to FP. Accordingly, FP is

treated as receiving a distribution of $50 from FS1.



Under Prop. Treas. Reg. § 1.367(b)-3(g)(3), $15x ($50x x ($30x / $100x))

of FS1’s E&P and $35x ($50x x ($70x / $100x)) of FS2’s E&P are

designated as specified earnings. FS2 is treated as distributing $35x to

FS1.



Under sections 301(c)(1) and 954(c)(6), the $35x deemed distribution

from FS2 to FS1 is treated as a dividend that does not give rise to

FPHCI. FS1 must accordingly increase its E&P described in section

959(c)(3) by $35x to $65x, and FS2 must decrease its E&P described in

section 959(c)(3) by the same amount.



FS1 is then treated as making a distribution of $50x to FP. Under

sections 301(c)(1) and 954(c)(6), the $50x deemed distribution is also

treated as a dividend that does not give rise to FPHCI. FP must

accordingly increase its E&P described in section 959(c)(3) by $50x to

$90x, and FS1 must decrease its E&P described in section 959(c)(3) by

the same amount.

FP

USP

FS1

Assets AB = $95x

Liabilities = $0

E&P = 

$40x 

+ $50x = $90x

USS

FS2

20%

FMV = $20x

AB = $1x

E&P = 

$8x

 + $10x = $18x

80%

FMV = $80x

AB = $4x

E&P = 

$32x 

+ $40x = $72x

E&P = 

$30x 

+$35x - $50x = $15x

E&P = 

$70x 

- $35x = $35x

Deemed

Distribution

of $50x

Deemed

Distribution

of $35x

Prop. Treas. Reg. § 1.367(b)-3(g)(6), Example 1 (continued)

Inbound F Reorganization with Excess Asset Basis

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D.

Adjusted all E&P amount attributable to USP’s FP stock



Under Prop. Treas. Reg. § 1.367(b)-3(g)(1), USP must compute the all E&P

amount attributable to its stock of FP after taking into account the $50x

increase to FP’s E&P that resulted from the deemed distribution of

specified earnings. Because USP owns 80% of the stock of FP, $40x

(calculated as 80% of $50x) of the specified earnings are attributable to

USP’s stock of FP and are included in the all E&P amount attributable to

USP’s stock of FP. The all E&P amount that USP must include in income as

a deemed dividend is therefore $72x ($32x + $40x).

E.

Adjusted all E&P amount attributable to USS’s FP stock.



Under Prop. Treas. Reg. § 1.367(b)-3(g)(1), USS must compute the all E&P

amount attributable to its stock of FP after taking into account the $50x

increase to FP’s E&P that resulted from the deemed distribution of

specified earnings. Because USS owns 20% of the stock of FP, $10x

(calculated as 20% of $50x) of the specified earnings are attributable to

USS’s stock of FP and are included in the all E&P amount attributable to

USS’s stock of FP. The all E&P amount that USS must include in income as

a deemed divided is therefore $18x ($8x + $10x).

Analysis

FP

USP

FS1

Assets AB = $95x

Liabilities = $0

E&P = 

$40x 

+ $50x = $90x

USS

FS2

20%

FMV = $20x

AB = $1x

E&P = 

$8x

 + $10x = $18x

80%

FMV = $80x

AB = $4x

E&P = 

$32x 

+ $40x = $72x

E&P = 

$30x 

+$35x - $50x = $15x

E&P = 

$70x 

- $35x = $35x

Deemed

Distribution

of $50x

Deemed

Distribution

of $35x

Prop. Treas. Reg. § 1.367(b)-3(g)(6)(ii), Example 2

Section 332 Liquidation of a First-Tier CFC with Excess Asset Basis

Facts

FP Liquidation

1

Analysis

A.

All E&P Amount:

1)

The FP Liquidation is subject to section 367(b) and Prop. Treas. Reg. §

1.367(b)-3. Under Prop. Treas. Reg. § 1.367(b)-3(b)(3), USP must include in

income as a deemed dividend the all E&P amount with respect to its FP stock.

2)

Because there is EAB with respect to FP, USP must compute the all E&P

amount attributable to its FP stock as if FP had received a distribution of

specified earnings immediately before the FP Liquidation.

B.

Deemed distribution of specified earnings:

1)

The amount of specified earnings equals $100x, the lesser of the following

amounts: (i) $200x, the E&P of FS; and (ii) $100x, the amount of EAB with

respect to FP.

2)

FS is accordingly treated as making a distribution of $100x to FP.

i.

Under sections 301(c)(1) and 959(b), the $100x deemed distribution

from FS to FP is treated as a distribution of PTEP that is not included in

the gross income of FP for purposes of section 951.

ii.

The distribution reduces FS’s E&P and PTEP with respect to USP by

$100x and increases FP’s E&P and PTEP with respect to USP by $100x.

iii.

Appropriate adjustments are made under section 961 for the

distribution of PTEP.

Prop. Treas. Reg. § 1.367(b)-3(g)(6)(ii), Example 2

Section 332 Liquidation of a First-Tier CFC with Excess Asset Basis

Analysis

FP

USP

FS

EAB = $100x

E&P = $50x

PTEP = $100x

Deemed distribution of

specified earnings of $100x

Deemed distribution of

$100x of PTEP

Income = $50x

•

Analysis

C.

Adjusted All E&P attributable to USP’s stock of FP:

1)

Under Prop. Treas. Reg. § 1.367(b)-3(g)(1), USP must compute the all E&P

amount attributable to its FP stock after taking into account the $100x

increase to FP’s E&P that resulted from the deemed distribution of

specified earnings.

2)

Because the deemed distribution consisted entirely of PTEP with respect

to USP, the deemed distribution does not affect USP’s all E&P amount of

$50x. 

See

 Treas. Reg. § 1.367(b)-2(d)(2)(ii).

3)

USP must therefore include $50x in income as a deemed dividend under

Prop. Treas. Reg. § 1.367(b)-3. USP must also recognize any foreign

currency gain or loss under section 986(c) with respect to the $100x of

PTEP of FP. 

See

 Treas. Reg. § 1.367(b)-2(j)(2).

PTEP = $200x -

$100x = $100x

All E&P = $50x + $0 =

$50x

Prop. Treas. Reg. § 1.367(b)-4(g)(3), Example

USP

USS

FP

FT

FS

1

1

2

Transfers $100

FP Voting Stock

$40 of FS stock

$60 of cash

Issues $100 FP Voting Stock

FMV: $100

Adjusted Basis: $20

1248 Amount: $50

E&P: $60

Facts

A

n

a

l

y

s

i

s

:

(

A

)

A

p

p

l

i

c

a

t

i

o

n

o

f

T

r

e

a

s

.

R

e

g

.

§

1

.

3

6

7

(

b

)

-

1

0

:

•

The triangular B reorganization is described in Treas. Reg. § 1.367(b)-10, and

the $60 of cash constitutes property under Treas. Reg. § 1.367(b)-10(a)(3)(ii).

•

Pursuant to Treas. Reg. § 1.367(b)-10(b)(1), adjustments must be made that

have the effect of a distribution of property in the amount of $60x from FS to

FP under section 301.

•

The $60x deemed distribution is treated as separate from, and occurring

immediately before, FS’s acquisition of the 60% FP block used in the triangular

B reorganization.

•

The $60x deemed distribution from FS to FP results in $60x of dividend income

to FP under section 301(c)(1) that is not FPHCI under section 954(c)(6).

(

B

)

A

p

p

l

i

c

a

t

i

o

n

o

f

P

r

o

p

.

T

r

e

a

s

.

R

e

g

.

§

1

.

3

6

7

(

b

)

-

4

(

g

)

:

•

Pursuant to  Treas. Reg. § 1.367(a)-3(a)(2)(iv)(B), 

Prop. Treas. Reg. § 1.367(b)-

4(g) 

applies to $60x of the stock of FT (the 60% FT block) exchanged for the 60%

FP block. Thus, under 

Prop. Treas. Reg. § 1.367(b)-4

(g)(1)(i), USS must include in

income a $30x deemed dividend (representing 60 percent of USS’s $50x section

1248 amount) with respect to the 60% FT block exchanged for the 60% FP block.

Prop. Treas. Reg. § 1.367(b)-4(g)(3), Example

USP

USS

FP

FT

FS

A

FMV: $100

Adjusted Basis: $20

1248 Amount: $50

Deemed dividend

of $60x

E&P = 

$60x 

-60x = $0x

Deemed dividend = ($50x x

60%)= $30x

BIG in 60% FT stock

FMV = $100x x 60% = $60

AB = $20x x 60% = $12

Initial BIG = $60 - $12 = $48

AB is increased by $30x of the

deemed dividend income

BIG  = $48 - $30 = $18

BIG in 40% FT stock

BIG = ($100x - $20x) - $48 = $32

1248 amount in the 40%

FP block 

= $50x x 40% = $20x

B

C

Analysis

A

n

a

l

y

s

i

s

(

C

o

n

t

i

n

u

e

d

)

(

C

)

A

p

p

l

i

c

a

t

i

o

n

o

f

P

r

o

p

.

T

r

e

a

s

.

R

e

g

.

§

1

.

3

6

7

(

b

)

-

4

(

g

)

c

o

n

t

.

:

•

In addition, under 

Prop. Treas. Reg. § 1.367(b)-4

(g)(1)(ii), USS must recognize its

realized gain that would not otherwise be recognized with respect to the 60% FT

block.

•

USS’s FMV and adjusted basis in the 60% FT block are $60x (60 percent of the

$100x FMV of the stock of FT) and $12x (60 percent of the $20x adjusted basis of

the stock of FT), respectively.

•

USS’s initial built-in gain with respect to the 60% FT block is accordingly $48x ($60x

FMV less $12x adjusted basis). The $30x deemed dividend increases USS’s basis in

the 60% FT block to $42 ($12x + $30x), leaving $18x ($60x - $42x) of built-in gain.

o

USS must therefore recognize the remaining $18x of gain with respect to the

60% FT block.

(

D

)

A

p

p

l

i

c

a

t

i

o

n

o

f

P

r

o

p

.

T

r

e

a

s

.

R

e

g

.

§

1

.

3

6

7

(

b

)

-

4

(

b

)

a

n

d

r

e

g

u

l

a

t

i

o

n

s

u

n

d

e

r

s

e

c

t

i

o

n

3

6

7

(

a

)

•

USS has $32x of built-in gain in the remaining $40x of stock of FT (the 40% FT

block) that USS exchanged for the 40% FP block, calculated as USS’s initial $80 of

built-in gain in all of its stock of FT less the $48x of initial built-in gain attributable

to the 60% FT block.

•

USS’s section 1248 amount in the 40% FT block is $20x, calculated as 40 percent of

USS’s $50x section 1248 amount. USS does not recognize a deemed dividend of the

$20x section 1248 amount under 

Prop. Treas. Reg. § 1.367(b)-4(b) 

because FT

remains a controlled foreign corporation with respect to which USS is a section

1248 shareholder immediately after the triangular B reorganization.

•

Unless USS properly files a gain recognition agreement pursuant to Treas. Regs. 

§§

1.367(a)-3(b) and 1.367(a)-8, USS recognizes the $32x of built-in gain under section

367(a)(1) with respect to the 40% FT block.

Prop. Treas. Reg. § 1.367(b)-10(d)(2), Example 1

Anti-Abuse Rule: Deemed increase to S’s E&P

FP

USS

2.1

Facts

E&P: $0

FP

USS

4

UST

Foreign

Person

E&P: $100x

E&P: $0

2.2

-

+

FP stock

$10x

USS stock

$10x

USS note

$90x

FP stock

$90x

FP stock

$100x

UST stock

UST

E&P: $100x

+

-

•

A

n

a

l

y

s

i

s

:

A.

Because USS’s purchase of the $90x of stock of FP in exchange for the

USS note is engaged in with a view to avoid the purpose of 

Prop.

Treas. Reg. § 1.367(b)-10, the anti-abuse rule applies and appropriate

adjustments are made.

B.

In particular, for purposes of determining the consequences of the

deemed distribution provided for in 

Prop. 

Treas. Reg. § 1.367(b)-

10(b)(1), the E&P of USS are deemed to include the E&P of UST. USS is

therefore treated as having made a deemed distribution equal to

$90x, which reflects the portion of the stock of FP that USS acquired in

exchange for property (the USS Note). Because USS is deemed to have

$100x of E&P, the entire $90x deemed distribution is treated as a

dividend under section 301(c)(1).

C.

The deemed distribution is treated as separate from, and occurring

immediately before, USS’s acquisition of the stock of FP used in the

triangular B reorganization.

D.

No adjustments are made by FP to the basis in its stock of USS except

as provided in Treas. Reg. § 1.358-6. Under Prop. Treas. Reg. §

1.367(b)-10(b)(3), FP’s adjustment to the basis in its stock of USS

under Treas. Reg. § 1.358-6 is determined as if FP provided all $100x

of the stock of FP pursuant to the plan of reorganization.

Deemed

distribution of

$90x

Prop. Treas. Reg. § 1.367(b)-10(d)(3), Example 2

Anti-Abuse Rule: Downstream Property Transfer

Analysis

USP

FS1

USS Newco

FS2 Newco

+

-

USP Note

1

3

Decrease E&P

$100x E&P

Deemed

distribution of

$100x

USP Note

Income: $100x

$100x of E&P

No E&P

2

All FS1 assets

(other than USS

Newco stock) for

USS Newco stock

Liquidating

distribution

+

•

Analysis:

A.

Because FS1’s transfer of the USP Note to USS Newco is in connection

with a triangular reorganization and is engaged in with a view to avoid

the purpose of 

Prop. Treas

. Reg. 

§

 1.367(b)-10, the anti-abuse rule of

Prop.

 Treas. Reg. 

§

 1.367(b)-10(d) applies and the following

adjustments are made:

1)

FS1’s formation of USS Newco and transfer of the USP Note to

USS Newco, together with the distribution of the shares of USS

Newco pursuant to the liquidation of FS1, is treated under the

anti-abuse rule as a distribution of $100x, consistent with its

substance. Accordingly, the following adjustments are made

consistent with 

such distribution

:

i.

Because FS1 has more than $100x of E&P, the adjustments

made are consistent with USS Newco having received a

$100x dividend from FS1 separate from, and immediately

before, the Triangular C Reorganization. USS Newco must

therefore include $100x in gross income as if it had

received that amount as a dividend and increase its E&P by

the same amount. FS1 must decrease its E&P by $100x.

ii.

For purposes of determining USS Newco’s basis in its stock

of FS2 Newco, Treas. Reg. 

§

 1.367(b)-13 applies by treating

USS Newco as P (within the meaning of Treas. Reg. 

§

1.367(b)-13(a)(2)(ii)). Under 

Prop. Treas

. Reg. 

§

 1.367(b)-

10(b)(3), USS Newco’s adjustment to the basis in its FS2

Newco stock under Treas. Reg. 

§

 1.367(b)-13 is determined

as if USS Newco provided the stock of USS Newco stock

pursuant to the 

plan

 of reorganization.

Prop. Treas. Reg. § 1.367(b)-10(d)(4), Example 3

Anti-Abuse Rule: Taxable Debt Exchange

•

Analysis:

A.

Because the transfers of the FS Note are in connection with a

triangular reorganization and are engaged in with a view to avoid the

purpose of 

Prop. 

Treas. Reg. 

§

 1.367(b)-10, the anti-abuse rule of 

Prop.

Treas. Reg. 

§

 1.367(b)-10(d) applies and the following adjustments are

made:

1)

FS is treated as having made a distribution to FP of $100x,

reflecting the value of the FP stock that FS acquired for the FS

Note. This deemed distribution is treated as separate from, and

occurring immediately before, FS’s acquisition of the FP stock

used in the Triangular B Reorganization.

i.

Because FS has more than $100x of E&P, the entire deemed

distribution is treated as a dividend under section 301(c)(1).

ii.

The deemed dividend causes FP to increase its E&P by

$100x but does not constitute FPHCI to FP under section

954(c)(6). Thus, FP has $100x of E&P available to support

inclusions under section 951(a)(1)(B) in connection with

FP’s subsequent acquisition of the USP Note.

iii.

No adjustments are made by FP to the basis in its FS stock

except as provided in Treas. Reg. 

§

 1.358-6. Under 

Prop.

Treas. Reg. 

§

 1.367(b)-10(b)(3), FP’s adjustment to the basis

in its FS stock under Treas. Reg. 

§

 1.358-6 is determined as

if FP provided the FP stock pursuant to the plan of

reorganization.

Facts

E&P = $0 + 

$100x =

$100x

FP

USP

FS

UST

USS

Decrease E&P

$100x

$100x of

FP voting stock

1

1

$100x of

FP voting stock

UST stock

2

FS Note

($100x FMV)

FS Note

for USP Note

3

3

+

-

-

UST

FS Note

$100x deemed

distribution

USP Note

($100x FMV)

Proposed Section 367(d) Regulations

29

29

•

On May 2, 2023, Treasury and the IRS released proposed rules that would

terminate the continued application of section 367(d) arising from a prior

outbound transfer of intangible property (IP), when the IP is repatriated to

certain qualified U.S. persons.

•

“Continued application of section 367(d) in these situations could result in excessive U.S. taxation and may

disincentivize certain repatriations of intangible property.”

•

Section 367(d) generally treats an outbound transfer of IP as a sale for

contingent payments, and requires the U.S. transferor to include amounts

annually over the life of the IP

•

The proposed rules provide a mechanism to terminate this annual inclusion

when the IP is repatriated and would apply to repatriation of IP occurring

on or after publication of final regulations.

Section 367(d) – Proposed Regulations for

Repatriation of IP

30

•

Sec. 367(d) termination occurs if (i) the IP is transferred by the foreign corporation to a Qualified Domestic

Person (generally, the U.S. transferor, related U.S. person, or successor) and (ii) reporting requirements are

met

•

Tax consequences to U.S. transferor

.  The U.S. transferor includes in income a final partial annual inclusion,

and depending on the form of the transaction, must recognize gain

•

Foreign corporation adjustments

.  The E&P and gross income of the foreign corporation are reduced to

offset the impact of the gain shifted to the U.S. transferor.

•

Qualified domestic person’s adjusted basis in the repatriated IP

.

•

If the IP is NOT transferred basis property, the adjusted basis is equal to the FMV of the IP

•

If the IP is transferred basis property, the adjusted basis is—

•

The lesser of the U.S. transferor’s former adjusted basis in the IP or the transferee foreign corporation’s

adjusted basis in the IP, increased by

•

The greater of the gain recognized by the U.S. transferor or the foreign corporation

31

Section 367(d) – Proposed Regulations for

Repatriation of IP

Section 367(d) – Proposed Regulations for

Repatriation of IP (Examples)

32

32

Minimum Taxes: Cross-Border M&A Considerations

33

33



Significantly increased complexity with enactment of TCJA in 2017



GILTI



FDII



BEAT



And now again starting in 2023



CAMT



Effective January 1, 2023



GloBE



EU members formally adopted directive on December 15, 2022



IIR effective as of January 1, 2024



UTPR effective as of January 1, 2025



UTPR safe harbor for first two years if ultimate parent entity jurisdiction has

corporate income tax rate of at least 20%



Certain transition rules apply to intragroup transactions occurring after

November 30, 2021

Cross-Border M&A Tax:  Increasing Complexity

34



Modeling is already imperative post-TCJA; now, taxpayers will need to model

results under all three regimes



Results will not be intuitive and, initially, perhaps also unfamiliar to M&A

tax practitioners who are not well versed in financial accounting



There are meaningful differences between the three regimes



US federal income tax



A standalone system, differs from financial accounting



In particular, structure of transaction—stock vs. asset sale, tax-free vs.

taxable—matters



CAMT and GloBE start with financial accounting principles



GAAP



Structure of transaction often doesn’t matter



E.g., in consolidation, all departures from group generally trigger gain

based on asset carrying value



Buyer group generally steps up asset carrying value to FMV

Evaluating Cross-Border Transactions

Under Multiple Regimes

35



IFRS



Broadly speaking comparable to GAAP, but there are differences



E.g., “push down” of purchase accounting adjustments



CAMT and GloBE both contain adjustments to the baseline financial

accounting rules



Under CAMT:



Treatment of tax consolidated group



Special rules for inclusions with respect to non-consolidated

subsidiaries



Dividends and other includible or deductible amounts under the Code

(other than GILTI and Subpart F)



Inclusion of pro rata share of CFC AFSI



Under GloBE:



Effectively ignores purchase and “pushdown” accounting adjustments



Ignores equity method, most dividends, and gains/losses from

dispositions of equity interests (unless Equity Investment Inclusion

Election or <10% portfolio holding)

Evaluating Cross-Border Transactions

Under Multiple Regimes (cont’d)

36



Every transaction will need to be evaluated and modeled from all three

perspectives, both to determine the specific consequences of the transaction,

as well as whether the disposition or acquisition will get you the taxpayer into

or out of CAMT or GloBE in the first place



CAMT Threshold



Average annual AFSI for three-year period exceeds $1 billion



For foreign-parented MNE, $1 billion threshold and its US entities

(including foreign entities’ effectively connected income) together have

average annual AFSI for three-year period exceeding $100 million



Notice 2023-7 provides rules for acquisitions, dispositions and

corporate separations



GloBE Threshold



More than €750 million in annual global revenue for two of prior four

fiscal years



Special rules for “mergers,” “demergers,” and constituent entities joining

or leaving a group

Evaluating Cross-Border Transactions

Under Multiple Regimes (cont’d)

37

Buy Side: Example 1 (No Foreign Tax or GW)

F

a

c

t

s

a

n

d

a

s

s

u

m

p

t

i

o

n

s

•

US Buyer agrees to purchase the stock of Foreign Co from its shareholders for $500, and wants to determine the benefit to it (if any) of making a Section

338(g) election for the purchase.

•

U

S

B

u

y

e

r

•

“Applicable corporation” for CAMT purposes

•

Owns at least one CFC incorporated in a jurisdiction that has adopted a UTPR (not depicted)

•

Prepares financial statements under US GAAP

•

15% ETR from legacy operations

•

F

o

r

e

i

g

n

C

o

•

Resident in jurisdiction with 0% tax rate

•

Owns two kinds of assets—foreign tangible assets and foreign intangible assets other than goodwill—all of which have a useful life of 10 years for book

and tax purposes

•

Expected to generate $200 of income (excluding depreciation) for book and tax purposes in the year after purchase

38



Section 56A(c)(13): Adjust AFSI for depreciation deductions allowed under

Section 167 with respect to Section 168 property.



Notice 2023-7: Depreciation adjustments necessary to reduce AFSI by tax

depreciation expense and to disregard depreciation expense reflected on the

AFS.



Tax depreciation adjustment includes amounts that have been:



Capitalized and recovered as COGS in computing taxable income for the

tax year, and



Allowed as a deduction in computing taxable income for the tax year.



AFSI adjusted to disregard:



Depreciation expense and impairment loss / reversal included in COGS in

the AFS,



Depreciation expense and impairment loss / reversal taken into account in

the AFS, and



Amounts recognized as an expense or loss in the AFS and as depreciable

basis for tax purposes.



Applicability - depreciation adjustments set forth in the Notice apply to

property placed in service in any taxable year

CAMT – Adjustments to AFSI for Depreciation

39



Section 56A(c)(3): US Shareholder of a CFC includes pro rata share of

items that are taken into account in computing the net income or loss set

forth on the CFC’s AFS.



CFC net loss does not reduce U.S. Shareholder’s AFSI but can be

carried forward to succeeding taxable year



Not taken into account for CAMT purposes



Section 250 deductions



Section 245A dividends-received deductions



QBAI



Exempt income (e.g., foreign oil and gas income)

CAMT – Inclusion of CFC income

40



Under both US GAAP and IFRS, an acquisition of target equity in a change

of control transaction (as well as an acquisition of assets representing a

business) is reflected as an acquisition of the target’s assets on the

consolidated financial statements of the MNE group.



Under this so-called “purchase accounting,” the assets of the target entity

are recorded on the consolidated financial statements of the MNE group

at FMV and goodwill (or a bargain purchase) is recognized.

Purchase Accounting: In General

41



Under push down accounting, assets are not only stepped up (or down)

to FMV at the target entity level but are also stepped up (or down) with

respect to all of the target’s direct and indirect controlled subsidiaries

where the purchase price adjustments are recognized in the stand-alone

financial statements of the target.



Under U.S. GAAP (ASC 805), after the acquisition, the target generally has

the option to apply push down accounting in its separate financial

statements.



Under IFRS (IFRS 3), push down accounting is not permitted.

“Push Down” Accounting

42



Buyer Consequences



A

r

t

.

6

.

2

.

1

(

c

)

–

“

i

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t

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e

a

c

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Purchase Accounting under GloBE

Seller

Buyer

Target

Target

Sale

43



Article 4.3.2(c) of the GloBE Rules require the allocation of some CFC taxes from the

Constituent Entity-Owner that is subject to a CFC regime to the CFC that gave rise to

the CFC charge.



A specific methodology is not prescribed and the Commentary states that

CFC taxes should be allocated based upon a Constituent Entity’s share of

the underlying income.



Administrative guidance clarifies how CFC taxes should be allocated when such taxes

are generated under a 'Blended CFC Tax Regime', which is a CFC tax that is “computed

based on a blend of income, losses and / or creditable taxes of multiple CFCs whose

ownership interests are held by a constituent entity-owner (or multiple constituent

entity-owners that file a single tax return)”.



Confirms that GILTI, in its current form, meets the definition of a CFC Tax

Regime.



GILTI is an example of a Blended CFC Tax Regime, the guidance outlines

an agreed “simplified allocation that can be applied to Blended CFC Tax

Regimes, including GILTI, for a limited time period.”



GILTI tax is only allocated to low-taxed constituent entities (i.e., ETR <

13.125%)



If no such entities exist in the group, tax remains in the U.S. group



Subpart F and CAMT are not expected to be Blended CFC Tax Regimes.

Allocation of CFC taxes under GloBE

44

Buy Side: Example 1 (cont’d)

*  Assumes that tangible assets are depreciated under

§168, so Foreign Co uses tax depreciation ($0) w/r/t such

assets when computing AFSI

** Because the top-up tax is imposed under the UTPR,

assumes GloBE tax is not creditable for U.S. tax or CAMT

purposes

∞ Note that calculations reflect rounding

45

Buy Side: Example 1 (cont’d)

G

I

L

T

I

•

Without a 338 election, US Buyer has no basis in the Foreign Co

assets, so no depreciation or deductions for QBAI

•

Section 338 election gives US Buyer a stepped up basis in Foreign

Co’s assets, which allows it to take:

•

$50 of depreciation/amortization deductions

•

A deduction for 10% of its QBAI (i.e., its tangible assets)

C

A

M

T

•

338 election largely does not affect CAMT because book-based;

instead, GAAP purchase accounting rules give US Buyer FMV

carrying value in Foreign Co’s assets

•

Except

 under CAMT, tangible assets are still depreciated using

§168 tax depreciation – without 338 election, no stepped up basis,

so no depreciation of tangible assets

•

CAMT eliminates benefit of GILTI rate and deduction for QBAI

G

l

o

B

E

•

CAMT and GloBE are both based on book accounting

•

But

 no purchase accounting adjustments under GloBE (unlike

CAMT) – assets are acquired with carryover book carrying value

(

i.e.

, $0), so no depreciation deductions

•

Therefore, even though CAMT and GloBE apply the same minimum

tax rate of 15%, because no purchase accounting in GloBE, a top-up

tax is owed under GloBE on top of the CAMT liability

*  Assumes that tangible assets are depreciated under §168, so Foreign Co uses

tax depreciation ($0) w/r/t such assets when computing AFSI

** Because the top-up tax is imposed under the UTPR, assumes GloBE tax is not

creditable for U.S. tax or CAMT purposes

∞ Note that calculations reflect rounding

46

Buy Side: Example 2 (Foreign Tax and GW)

Facts and assumptions

The facts and assumptions are the same as Example 1, except that:

•

Foreign Co is resident in a jurisdiction with a 5% tax rate

•

Foreign Co owns two kinds of assets—foreign intangibles with a useful life

of 10 years and foreign goodwill



Section 59(l) provides for a CAMT FTC for:



A foreign income tax “within the meaning of section 901”



That is “taken into account on the applicable financial

statement” of the applicable corporation or its CFC



And is “paid or accrued (for Federal income tax

purposes)” by the applicable corporation or the CFC



15% limitation on foreign income taxes paid or accrued by a CFC,

with a 5-year carryforward of CFC foreign taxes



It appears that neither section 901(m) nor section 904

limitations should apply for purposes of the CAMT FTC.

Foreign Tax Credits under CAMT

48

Buy Side: Example 2 

(cont’d)

* For simplicity, ignores deductibility of foreign taxes disallowed for credit

purposes under § 901(m). Also assumes that § 901(m) does not apply for CAMT

purposes

** Because the top-up tax is imposed under the UTPR, assumes GloBE tax is not

creditable for U.S. tax or CAMT purposes

∞ Note that calculations reflect rounding

Buy Side: Example 2 (cont’d)

G

I

L

T

I



338 election creates amortizable basis in assets ($40

deduction)



Addition of $10 of foreign taxes at Foreign Co means:

•

Net CFC tested income is reduced by foreign taxes (but

foreign taxes added back via §78 gross-up)

•

FTC equal to only 80% of foreign income taxes



In addition, with 338 election, becomes “covered asset

acquisition” subject to 901(m) disallowance of 20% ($40

basis difference ÷ $200 tax base)

C

A

M

T



Lose benefit of basis step-up with 338 election

•

In addition to higher rate, no book depreciation on goodwill



But GILTI rate cut-back is reduced because CAMT FTC is

more favorable than regular tax FTC

•

Not limited to 80% of foreign taxes paid and likely not

subject to 901(m) disallowance

G

l

o

B

E



No purchase accounting adjustments to carrying value of

assets means no additional depreciation



FTC also affects calculation



Accordingly, GloBE top-up tax owed because of (1) no

depreciation and (2) CAMT FTC, clawing back benefit of

both that remained after application of CAMT

50

Sell Side: Example 1 (Sale of Wholly Owned CFC)

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51

CAMT - Gain with respect to CFC

Stock

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52



Excluded Dividends means, subject to certain investment-type entity

exceptions and portfolio stock held for less than one year, dividends or

other distributions received or accrued in respect of an Ownership

Interest.



Excluded Equity Gain or Loss means the net gain or loss included in the

Financial Accounting Net Income or Loss of the Constituent Entity arising

from:

a)

gains and losses from changes in fair value of an Ownership

Interest, except for a Portfolio Shareholding;

b)

profit or loss in respect of an Ownership Interest included under

the equity method of accounting; and

c)

gains and losses from disposition of an Ownership Interest, except

for a disposition of a Portfolio Shareholding.

GloBE - Excluded Dividends &

Excluded Equity Gain or Loss

53

Eligibility for Equity Investment Inclusion Election

1.

Fair value gains and losses and impairments on that

Ownership Interest where the owner is taxable on a

mark-to-market basis or on the impairment (and the

tax consequences of the mark-to-market movements

or impairments on Ownership Interest are reflected

in Income tax expense) or the owner is taxable on a

realization basis and the Income tax expense

includes deferred tax expense on the mark to market

movement or impairments on the Ownership

Interest;

2.

Profit and loss attributable to that Ownership Interest

where the interest is in a Tax Transparent Entity and

the owner accounts for the interest using the equity

method; and

3.

The dispositions of that Ownership Interest which

give rise to gains or losses that are included in the

owner’s domestic taxable income, excluding any

gain fully offset, and the proportionate share of any

gain partially offset, by any deduction or other similar

relief particular to the type of gain (such as a

participation exemption directly attributable to the

disposition of the Ownership Interest).

•

Five-year election

•

Per jurisdiction

•

Current and deferred

tax expense associated

with these items

included in Adjusted

Covered Taxes

54

Sell Side: Example 1 (cont’d)

Sell Side: Example 2 (Sale of Foreign DRE to Foreign Buyer)