The following article is reprinted from The M&A Tax Report, Vol. 11, No. 12, July 2003, Panel Publishers, New York, NY.


By Robert W. Wood

What tax considerations arise if you are a U.S. taxpayer and you are buying a non-U.S. business? In large part, the answer may be the same considerations that you have when you are buying a U.S. business. Indeed, you will have fundamental structural (and thus tax) considerations, including whether the purchase will be cast as an asset deal or a stock purchase. In the latter case, you will have questions (as you would with a garden variety domestic stock purchase) whether to make a Section 338 election. You will consider the tax attributes of the target company, and the appropriate allocation of consideration among the various assets. Allocation of consideration issues can even arise where it is stock that is being purchased, as in a group of related corporations.

All of these issues, of course, are quite familiar to readers of The M&A Tax Report. But there are some additional wrinkles where the business or businesses being acquired are foreign. U.S. business sellers will generally seek to maximize their use of foreign tax credits against any U.S. tax imposed on the sale (who can blame them?). It should come as no surprise to anyone that sellers (whether U.S. or foreign) will generally attempt to minimize the amount of taxes imposed on the transaction by the various taxing authorities.

Focusing on the former, the structure that is most frequently employed by U.S. business sellers is a sale of the stock of a foreign subsidiary. The idea, of course, is to invoke Section 1248 of the Code, which generally states that a U.S. shareholder who sells or exchanges stock in a controlled foreign corporation and recognizes gain, will have that gain treated as a dividend to the extent of the post-1962 earnings and profits of the CFC (and any lower-tiered CFCs) that are attributable to the period and percentage of ownership of the U.S. shareholder. The amount of this gain treated as a dividend in this way is often referred to as the "Section 1248 amount."

Of course, to effectively take advantage of the foreign tax credits, the seller will also be concerned about the specific baskets to which the foreign tax credits are allocated. The foreign tax credit topic is itself a complex one, and there are various limitations, including a passive income basket.

In a forthcoming article, we'll be examining the U.S. tax issues that face both buyers and sellers of non-U.S. businesses.

Buying (or Selling) Foreign Businesses, Vol. 11, No. 12, The M&A Tax Report (July 2003), p. 1.