The IRS issued final regulations under IRC Section 367(b) concerning the treatment of property used to acquire parent stock or securities in certain triangular reorganizations involving foreign corporations, commonly called "Killer B" transactions. T.D. 9526, 76 FR 28890; Treas. Reg. §§ 1.367(a)-3, 1.367(b)-10. The regulations finalize the proposed regulations with certain modifications and withdraw the temporary regulations issued in 2008. T.D. 9400, 73 FR 30301; Temp. Treas. Reg. §§ 1.367(a)-3T , 1.367(b)-14T. These final regulations apply to transactions occurring on or after May 17, 2011. For transactions that occur prior to May 17, 2011, Treasury Regulation Section 1.367(b)-14T applies. Treas. Reg. § 1.367(b)-10(e).
Killer B transactions are cross-border triangular reorganizations that have the effect of repatriating foreign earnings of the subsidiary to the parent without a corresponding dividend to the parent that would be subject to U.S. income tax. Specifically, the final regulations apply to triangular reorganizations involving one or more foreign corporations in which a subsidiary purchases, in connection with the reorganization, stock of its parent corporation in exchange for property, and exchanges the parent stock for the stock or property of a target corporation, but only if the parent or subsidiary (or both) is a foreign corporation. Treas. Reg. § 1.367(b)-10(a).
General Rule. The final regulations make adjustments that have the effect of:
- (1) a deemed distribution of property (with no built-in gain or loss) from the subsidiary to the parent under IRC Section 301; [Treas. Reg. § 1.367(b)-10(b)(1)]; or
- (2) in a situation where the subsidiary buys its parent's stock from a party other than the parent, a deemed contribution of property (with no built-in gain or loss) by the parent to the subsidiary in an amount equal to the amount of the deemed distribution from the subsidiary to the parent. Treas. Reg. § 1.367(b)-10(b)(2).
The amount of the deemed distribution is equal to the sum of the amount of money transferred by the subsidiary, the amount of liabilities that are assumed by the subsidiary and constitute property, and the fair market value of other property transferred by the subsidiary in exchange for the parent stock or securities. Treas. Reg. § 1.367(b)-10(b)(1).
Priority Rule. The final regulations modify the priority rule included in the prior regulations. Under the priority rule before modification, if the amount of gain in the target company stock that is otherwise recognized under IRC Section 367(a)(1) (absent an exception) is less than the adjustment treated as a dividend under the prior regulations, then the prior regulations apply to the triangular reorganization.
The final regulations modify the priority rule in the prior regulations such that the final regulations do not apply if:
- (1) the parent and subsidiary are foreign corporations, and neither the parent nor the subsidiary is a controlled foreign corporation [Treas. Reg. § 1.367(b)-10(b)(2)(a)] immediately before or immediately after the triangular reorganization [Treas. Reg. § 1.367(b)-10(a)(2)(i)]; or
- (2) four specific conditions apply [Treas. Reg. § 1.367(b)-10(a)(2)(ii)]: (a) the parent is a foreign corporation; (b) the subsidiary is a domestic corporation; (c) the parent's receipt of a dividend from the subsidiary would not be subject to U.S. gross basis withholding tax under either IRC Section 881 (e.g., by reason of an applicable treaty) or IRC Section 882; and (d) the parent's stock in the subsidiary is not a U.S. real property interest under IRC Section 897(c).
Timing Rules for Deemed Distributions and Contributions. Certain timing rules apply to the deemed distribution and deemed contribution. If the parent controls [as defined in IRC Section 368(c)] the subsidiary at the time of the parent acquisition, the deemed distribution and the deemed contribution are treated as separate transactions occurring immediately before the acquisition. Treas. Reg. § 1.367(b)-10(b)(3). If the parent does not control the subsidiary at the time of the acquisition, the deemed distribution and the deemed contribution are treated as separate transactions occurring immediately after the parent acquires control of the subsidiary, but before the triangular reorganization. Treas. Reg. § 1.367(b)-10(b)(3).
Killer B transactions enabled corporations to repatriate the earnings of a foreign subsidiary tax-free to its domestic parent. Although the final regulations impede these types of transactions, it may only be a matter of time before multinational companies and their advisors adapt to the final regulations, and once again develop tax planning that lowers their effective tax rate.
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