{{item.videoDuration}}
{{item.title}}
{{item.text}}
{{item.videoDuration}}
{{item.title}}
{{item.text}}
Final regulations address triangular reorganizations and inbound nonrecognition transactions
July 2024
In brief
What happened?
Treasury and the IRS on July 17 released final regulations under Section 367(b) providing guidance on the taxation of cross-border triangular reorganizations and related transactions. The regulations finalize, without substantive change, proposed regulations published on October 6, 2023. The final regulations are effective July 17, 2024.
Why is it relevant?
The 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 modified the treatment of property used to acquire parent stock and the consequences to persons receiving such parent stock, but most importantly, Notice 2016-73 announced rules to modify the amount of income recognized in an inbound nonrecognition transaction, regardless of whether the taxpayer had engaged in a triangular reorganization.
Action to consider
Treasury and the IRS issued various guidance (regulations and notices) to address certain concerns it had with the use of triangular ‘B’ reorganizations in the cross-border context. The proposed regulations were based on prior notices with modifications. The final regulations, which finalize without substantive change the proposed regulations, therefore may have minimal impact on future transactions.
Anti-abuse rule
The 2011 Final Regulations contain an anti-abuse rule under which 'appropriate adjustments' are made if, in connection with a triangular reorganization, a transaction is engaged in with a view to avoid the purpose of the 2011 Final Regulations. Notice 2014-32 announced that future regulations would clarify that the anti-abuse rule may apply broadly to support a variety of adjustments, including adjusting earnings and profits (E&P) between previously unrelated corporations.
The new regulations implement the clarifications to the anti-abuse rule described in Notice 2014-32. The regulations do not modify the operative text of the anti-abuse rule, which remains unchanged from the 2011 Final Regulations, but do add examples purporting to apply the anti-abuse rule as written in the 2011 Final Regulations.
Observation: Certain language in the examples added in the 2023 proposed regulations may suggest a broader view by Treasury and the IRS of transactions that are considered as occurring 'in connection with' reorganizations and thus subject to the operative rules in Reg. 1.367(b)-10. Similarly, language in these examples may be read as evincing that Treasury and the IRS view broader adjustments, other than those to E&P, as 'appropriate' under the anti-abuse rule.
In response to a request for comments in the proposed regulations, Treasury received one comment regarding two examples included in the proposed regulations which Treasury and the IRS contend illustrate clarifications of the scope of an anti-abuse rule contained in the 2011 Final Regulations. The comment recommended Examples 2 (relating to a downstream property transfer) and 3 (relating to a taxable debt exchange) should either be eliminated from the final regulations or made to apply only prospectively as of October 5, 2023, the date the proposed regulations were filed with the Federal Register. The preamble to the final regulations notes that Treasury and the IRS maintain that the examples are simply illustrations of the same operative anti-abuse rule—unchanged since it was published in the 2011 Final Regulations and therefore did not adopt the comment’s recommendation.
Observation: By treating the added examples in the now final regulations as interpretations of the 2011 anti-abuse rule, Treasury and IRS are arguably retroactively implementing expansions of the 2011 anti-abuse rule, taking into account transactional variations not considered at the time the rule was initially finalized.
The final regulations also make a minor change to the facts of Example 3, relating to a taxable debt exchange.
Excess asset basis reduction rule/definition of ‘foreign subsidiary’
The final regulations clarify the definition of a foreign subsidiary as related to the excess asset basis (EAB) rules that create a deemed distribution of specified earnings to the foreign acquired corporation from foreign subsidiaries, with specified earnings drawn from each subsidiary on a pro rata basis. A 'foreign subsidiary' is defined in the proposed and final regulations by reference to the ownership requirements of Section 1248(c)(2)(B), which describes a 10% ownership threshold, taking into account the constructive ownership rules in Section 958(b). Under that definition, a foreign subsidiary could include a foreign corporation that the foreign acquired corporation is treated as owning solely through constructive ownership and in which it has no direct or indirect ownership interest. The final regulations modify Reg. 1.367(b)-3(g)(1) to clarify that possible result. See Reg. 1.367(b)-3(g)(1), fourth sentence (“the distribution is treated as being made through any intermediate owners, or directly from any constructively owned foreign subsidiaries, where applicable”) (emphasis added).
Observation: Defining 'foreign subsidiary' to include entities that are constructively owned by the foreign acquired corporation will require taxpayers within the EAB rules to determine specified earnings with respect to all 10% owned foreign entities in their structure, which could create administrative complexity.
See also
- Tax Insight: Proposed regulations address triangular reorganizations and inbound nonrecognition transactions (October 17, 2023)
{{filterContent.facetedTitle}}
{{contentList.loadingText}}
{{contentList.loadingText}}
Contact us
Follow us
