June 20, 06

NEWS / US Outbound: IRS issues final cross-border stock transfer rules

The Treasury Department and IRS in February 2006 issued final regulations (TD 9250) regarding the application of section 367 to cross-border stock transfers to which section 304 applies. The final regulations generally adopt rules that were proposed in May 2005, but with certain revisions.

When proposed in May 2005, the regulations were generally viewed as being taxpayer-favourable because they would render sections 367(a) and 367(b) inapplicable to deemed section 351(a) exchanges occurring pursuant to section 304(a)(1).

In general, the proposed regulations provided that if ??“ pursuant to section 304(a)(1) ??“ a US person is treated as transferring stock of a domestic or foreign target corporation to a foreign acquiring corporation in exchange for stock of the foreign acquiring corporation in a transaction to which section 351(a) applies, the deemed exchange is not a transfer to a foreign corporation subject to section 367(a).

This insures that taxpayers will not face multiple income inclusions as the result of the transfer, which could have been the case if both sections 304(a)(1) and 367 were deemed to apply.

Furthermore, the proposed regulations provided that if ??“ pursuant to section 304(a)(1) ??“ a foreign acquiring corporation is treated as acquiring the stock of a foreign target corporation in a transaction to which section 351(a) applies, the deemed section 351(a) exchange is not subject to section 367(b). The proposed regulations did not address section 351(a) exchanges other than those exchanges that are deemed to occur by reason of section 304(a)(1).
What the final regulations do

The final regulations generally adopt the provisions of the proposed regulations and make section 367(a) and (b) inapplicable to deemed section 351 exchanges pursuant to section 304(a)(1) transactions. With the release of the final rules, Treasury and the IRS indicated that certain issues are intended to be addressed in future guidance, including the recovery of basis in all redemptions treated as section 301 distributions, adjustments that can be made outside the context of section 304(b)(6), and the application of section 959 to previously-taxed amounts in connection with section 304(a)(1) transactions.

The final regulations adopt the general effective date contained in the proposed regulations and, therefore, apply to section 304(a)(1) transactions occurring on or after Tuesday, February 21 2006 ??“ the date when TD 9250 was published in the Federal Register. The final regulations, however, provide that taxpayers may rely on them for all (but not less than all) section 304(a)(1) transactions that occurred in all open tax years.

The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG LLP.

The information contained herein is general in nature and based on authorities that are subject to change. Applicability to specific situations is to be determined through consultation with your tax adviser.
KPMG LLP (US)

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