2012 Annual Meeting of the California Tax Bar & California Tax Policy Conference Nov. 3, 2012

1. TAX STRATEGIES
TAX STRATEGIES
CROSS-BORDER M&A AND REORGANIZATIONS
CROSS-BORDER M&A AND REORGANIZATIONS
Roger Royse
Royse Law Firm, PC
Palo Alto, San Francisco, Los Angeles
rroyse@rroyselaw.com
www.rroyselaw.com
www.rogerroyse.com
Skype: roger.royse 2012 Annual Meeting
Twitter: Rroyse00 of the California Tax
Bar & California Tax
Policy Conference
Nov. 3, 2012
IRS Circular 230 Disclosure: To ensure compliance with the requirements imposed by the IRS, we inform you that any tax advice contained in this
communication, including any attachment to this communication, is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1)
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avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to any other person any transaction or matter addressed herein.

2. OVERVIEW OF TRANSACTIONS
• Domestic Transactions
– Type A – Merger
– Type B – Stock for Stock
– Type C – Stock for Assets
– Type D – Spin Off, Split Off, Split Up, and
Type D Acquisitive Reorganizations
– Triangular Mergers
• Foreign Transactions
– §367(a) – Outbound Transactions
– §367(b) – Inbound and Foreign to
Foreign Transactions
– §7874 – Anti-Inversion Rules
– §338(g) Election
• Joint Ventures
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3. TYPE A REORGANIZATIONS
IRC §368(a)(1)(A) STATUTORY MERGER / CONSOLIDATION
Shareholders
Acquiror Stock; Boot
Target Acquiror
Target Assets; Merger
• Statutory Merger: Two or more • International A reorganizations
corporations combine and only are possible for transactions after
one survives (Rev. Rul. 2000-5) Jan. 23, 2006. Reg. § 1.368-
2(b)(1)(ii).
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4. TYPE B REORGANIZATIONS
IRC §368(a)(1)(B) STOCK FOR STOCK
Acquiror Stock
Shareholders Acquiror
Target Stock (Control)
Target
• Acquiror receives Target
stock, resulting in control of
Target, in exchange for Acquiror
voting stock.
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5. TYPE C REORGANIZATIONS
IRC §368(a)(1)(C) STOCK FOR ASSETS
Shareholders
Liquidation
Acquiror Stock; Boot
Target Acquiror
Target Assets
• Acquiror receives substantially • Up to 20% of the consideration
all of Target’s assets in exchange for Target's assets can be
for Acquiror voting stock. property other than Acquiror
– 70% of Target’s gross assets. voting stock (“boot”), but if any
– 90% of Target’s net assets. such boot exists, then any
liabilities assumed by Acquiror
• Reorganization Expenses are also treated as boot.
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6. TYPE D REORGANIZATIONS
IRC §§355, 368(a)(1)(D) DIVISIVE REORGANIZATION
Shareholders
T1, T2 Stock
T1 Stock; Control T2 Stock; Control
T1 Transferor T2
Assets Assets
• Active Business Requirement
• “Spin Off”; “Split Off”; “Split Up”
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7. TYPE D REORGANIZATIONS
IRC §§354, 356, 368(a)(1)(D) NON-DIVISIVE REORGS.
Merger
Shareholders
T’ee Stock
20%
T’ee Stock
Transferor Transferee
T’or Assets;
Merger
Failed Type C Liquidation and Reincorporation
T’ee Stock
Shareholders Shareholders Transferee
Liquid T’or Assets
Cash; T’ee Stock
ate
Cash; T’ee Stock
Transferor Transferee Transferor
T’or Assets
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8. TRIANGULAR / SUBSIDIARY MERGERS
FORWARD AND REVERSE TRIANGULAR MERGERS
Forward Triangular Merger Reverse Triangular Merger
Shareholders Shareholders
P Stock P Stock
P P
80% 80%
T Merger
S T Merger
S
Sub Survives Target Survives
Key:
T = Target P = Acquiror S = Merger Sub
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9. IRC §367(a)
OUTBOUND TRANSACTIONS
• If a US target transfers property to foreign acquiror pursuant to a
tax-free provision (e.g., Sections 332, 351, 354, 356, or 361),
• Then the foreign acquiror shall not be treated as a corporation
(i.e., would not qualify for tax-free provisions), and gain would
generally be recognized.
• Exception if all of the following are met:
1. No more than 50% of foreign acquiror stock is received by US target,
2. No more than 50% of foreign acquiror stock is owned after the transfer by US
persons that are officers or directors or by 5% US target shareholders,
3. Any 5% US target shareholders enter into a Gain Recognition Agreement,
4. FMV of foreign acquiror’s assets are at least equal to the FMV of US target,
5. 36 month active trade or business test is met, with no intent to substantially
dispose of or discontinue such trade or business,
6. Tax reporting requirements are satisfied.
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10. IRC §367(b)
INBOUND AND FOREIGN TO FOREIGN TRANSACTIONS
• Inclusion of All E&P Amount in domestication transactions
– 10% U.S. Shareholder
– 10% U.S.-Owned Foreign Corporate Shareholder
• Recognition of § 1248 Amount on loss of status as a §1248 Shareholder
• §1248 Amount: E&P attributable to stock accumulated in taxable years
beginning after December 31, 1962, and during the period or periods
the stock sold or exchanged was held by transferor while foreign
corporation was a CFC.
– Controlled Foreign Corporation (“CFC”): A foreign entity of which United States shareholders
collectively own more than 50% of the voting power or value. A “United States shareholder”
is a US person who owns at least 10% of the foreign entity.
• §1248 Shareholder: A US person who owns or is considered as owning
10% or more of the total combined voting power of all classes of stock
entitled to vote of a CFC at any time during the 5-year period ending on
the date of the sale or exchange.
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11. IRC §1248
SUBPART F INCOME
• Seller of Controlled Foreign Corporation (CFC) must
treat as dividend gain to extent of E&P
• §1248 inclusion carries foreign tax credits
• §1248 amount determined at year end and pro rated
based on day count, so post closing events can have an
effect on the §1248 amount
• Controlled Foreign Corporations (“CFCs”)
– A foreign entity is classified as a CFC if it has “United States
Shareholders” who collectively own more than 50% of the voting
power or value of the company. For the purposes of the CFC
rules, a “United States Shareholder” is defined as US persons
holding at least a 10% interest in the foreign corporation.
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12. IRC §367
JOINT VENTURE STRUCTURES
• Disguised Sale
US Company
Foreign Issues
Company
LLC
US & Foreign
Assets
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13. IRC §7874
ANTI-INVERSION RULES
• The IRS may tax outbound reorganization and/or tax foreign acquiror as a U.S.
taxpayer:
– If ownership of former U.S. target shareholders in foreign acquiror is 80% or more
then foreign acquiror is treated as a U.S. company
– If ownership continuity is between 60 and 80%, then the foreign acquiror is NOT
treated as a U.S. company, but U.S. tax attributes cannot be used to offset gains
– 20% excise tax on stock-based compensation upon certain corporate inversion
transactions.
• Exception:
– Companies with “substantial business activities” in the foreign jurisdiction; prior
facts and circumstances test compares activities of company in foreign
jurisdiction with activities of company globally.
– New proposed regulations (REG-107889-12, T.D. 9592) require group
employees, group assets, and group income located or derived in foreign country
of incorporation to equal at least 25% of worldwide group employees, assets, and
income. The “group income” definition makes this threshold very difficult in
some cases.
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14. IRC §338(g)
STOCK PURCHASE AS ASSET ACQUISITION ELECTION
• The US acquiror of a foreign-
owned, foreign target may make a
§338(g) election, which steps up
basis and eliminates E&P and
foreign tax credits.
• The target may be able to offset
§338(g) gains with net operating
losses.
• The acquiror of a US target with a
foreign subsidiary may make a
§338(g) election with regard to
both the US target and the foreign
subsidiary, triggering deemed sales
of the target’s stock in the
subsidiary and the subsidiary’s
assets and a §1248 dividend.
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15. ADDITIONAL RESOURCES
www.RoyseUniversity.com
Providing business, tax, and personal finance ideas to
founders and executives.
www.RoyseLink.com
Connecting founders with investors.
www.rroyselaw.com/ijuris_login_jp.html
Offering legal document templates and more.
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16. PALO ALTO LOS ANGELES SAN FRANCISCO
1717 Embarcadero Road 1150 Santa Monica Blvd. 135 Main Street
Palo Alto, CA 94306 Suite 1200 12th Floor
Los Angeles, CA 90025 San Francisco, CA 94105
www.rroyselaw.com
Twitter: RoyseLaw
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