2008-06-22
The U.S. Treasury Department recently issued temporary and proposed regulations under Code § 367(b) to close a loophole used by multinationals to repatriate cash from their foreign subsidiaries to the U.S. without paying tax on the repatriated earnings.
Background
On September 22, 2006, the IRS and Treasury Department issued Notice 2006- 85 (charted here), which announced that regulations would be issued under Code § 367(b) to address certain triangular reorganizations under section 368(a) involving one or more foreign corporations. On May 31, 2007, the IRS and Treasury Department issued Notice 2007-48 (charted here), which amplified Notice 2006-85 and announced that additional regulations would be issued under Code § 367(b).
Notice 2006-85 describes triangular reorganizations in which a subsidiary (S) purchases stock of its parent corporation (P) from P in exchange for property, and then exchanges the P stock for the stock or assets of a target corporation (T), but only if P or S (or both) is foreign. Notice 2006-85 announced that regulations to be issued under Code § 367(b) would make adjustments that would have the effect of a distribution of property from S to P under Code § 301 (deemed distribution).
Notice 2007-48 describes a transaction very similar to the transaction in Notice 2006-85, except that S purchases the P stock from a person other than P (such as from public shareholders on the open market).
The New Regulations
The new temporary and proposed regulations (Treas. Reg. § 1.367(b)-14T) apply to triangular reorganizations where P or S (or both) is foreign and, in connection with the reorganization, S acquires, in exchange for property, all or a portion of the P stock that is used to acquire the stock or assets of T. In a triangular reorganization subject to the temporary regulations, adjustments shall be made that have the effect of a distribution of property from S to P under Code § 301. The amount of the deemed distribution shall equal the amount of money plus the fair market value of other property that S used to acquire P stock.
In Notice 2006-85 and Notice 2007-48, the transactions were structured as triangular B reorganizations (sometimes referred to as “killer B” reorganizations). The regulations include an example (Treas. Reg. § 1.367(b)-14T(b)(4)) of another type of triangular reorganization (forward triangular merger -- Code §§ 368(a)(1)(A) and (a)(2)(D)) that could be used (if not for the new rules) to repatriate cash tax free (say, a "killer forward triangular merger"). We expect to create a chart of the example soon.