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July 19, 2024 Final IRC Section 367(b) regulations address certain cross-border triangular reorganizations and inbound nonrecognition transactions
The United States (US) Department of Treasury and the Internal Revenue Service (IRS) released final regulations 17 July (TD 10004; Final Regulations) under IRC Section 367(b) on the treatment of property used to acquire parent stock or securities in connection with certain cross-border triangular reorganizations and inbound nonrecognition transactions. The final regulations, which are effective on July 17, 2024, adopt the proposed regulations (see Tax Alert 2023-1683) without substantive changes. Consistent with the Proposed Regulations, the Final Regulations modify certain aspects of the existing regulations under IRC Section 367(b) (Existing Regulations) to incorporate, with certain modifications, guidance described in Notice 2014-32 (2014 Notice) and Notice 2016-73 (2016 Notice and collectively, the Notices), each issued in response to transactions perceived as exploiting certain aspects of the Existing Regulations. The Final Regulations narrow the scope of the "excess asset basis" (EAB) rules in the 2016 Notice. In light of the increased prevalence of previously taxed earnings and profits (PTEP) after the Tax Cuts and Jobs Act (TCJA), the Final Regulations also treat a foreign acquired corporation as receiving a deemed distribution under IRC Section 301 from its foreign subsidiaries instead of adjusting an exchanging shareholder's all earnings and profits (E&P) amount as described in the 2016 Notice. For an in-depth discussion of the 2016 Notice, see EY Tax Alert 2016--2116. Modifications made in the final regulations The Final Regulations make a minor change from the Proposed Regulations to the facts of Example 3 (taxable debt exchange) to remove language the IRS and Treasury said could create an inference as to how holding period requirements could be satisfied. For purposes of applying the EAB rules, the Final Regulations also clarify that any deemed distribution attributable to a constructively-owned foreign subsidiary should be treated as directly received by the foreign acquired corporation. The practical implication of this clarification is that the all earnings and profits amount of a foreign acquired corporation could include earnings of foreign subsidiaries not in the direct ownership chain, i.e., brother-sister entities to the foreign acquired corporation. While the inclusion is capped by the excess asset basis, it is unusual to pull in earnings of these other foreign subsidiaries. Applicability dates For the rules described in the 2014 Notice, the Final Regulations generally apply to transactions completed on or after 25 April 2014 (the date of the 2014 Notice). For the rules described in the 2016 Notice, the Final Regulations generally apply to transactions completed on or after 2 December 2016 (the date of the 2016 Notice). For rules included in the Proposed Regulations but not previously announced in the 2016 Notice, the Final Regulations apply to transactions completed on or after 5 October 2023 (the date the Proposed Regulations were published in the Federal Register). Implications Given the complexity introduced by the Final Regulations, taxpayers that had not previously assessed the impact of the Proposed Regulations, including the implications of the expansive definition of foreign subsidiary, would be prudent to carefully review the rules and examples in the Final Regulations and assess the impact of these rules on their transactions. Furthermore, cross-border transactions may create unexpected challenges if, for example, the requirements of the IRC Section 245A dividends-received deduction (DRD) are not met (e.g., due to US shareholder status, holding period, US-source E&P, hybrid dividends, or extraordinary disposition accounts). Additionally, shareholders that are generally ineligible for the IRC Section 245A DRD, such as individuals and corporate shareholders owning less than 10%, should carefully consider the effects of these rules on foreign corporation restructurings and other transactions.
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