US Tax Issues for Foreign Acquirers of US Companies

By Misey, Robert | Business Law International, January 2018 | Go to article overview

US Tax Issues for Foreign Acquirers of US Companies


Misey, Robert, Business Law International


This article focuses on issues that the foreign acquirer of shares of a US company should be aware of. The article begins by focusing on structuring and planning issues inherent in the purchase of a US company's shares, such as holding companies, tax elections, debt financing and sandwich structures. It then discusses the issues a corporate attorney must consider when drafting representations, covenants and indemnities. Although some tax laws are detailed in this section, the focus is on the language of these provisions that the attorney must include to protect the foreign acquirer.

Suppose that a foreign acquirer is going to acquire shares of a US target from a seller in a taxable transaction. What type of US tax issues should the foreign acquirer consider? The purpose of this article is to describe the US international tax issues that the foreign acquirer may see when structuring the taxable acquisition of the US target's shares and to provide sample language to protect the foreign acquirer in the acquisition agreement.

Acquisition structuring

Purchase of shares or assets

For the purposes of this article, it will be assumed that the foreign acquirer is making a taxable purchase of the US target's shares. Other forms of acquisition include a taxable purchase of a US target's assets or a corporate reorganisation that is tax-free with respect to the acquisition of either shares or assets.1

If the foreign acquirer purchases the shares of a US target, chances are the fair market value of the US target's shares (theoretically, the purchase price) is greater than the cost basis that the US target has in its individual assets.

The foreign acquirer can increase the US target's cost basis in its assets to fair market value, which increases the tax depreciation, by making a section 338(g) election. In effect, the transaction is treated as if the foreign acquirer makes a taxable asset purchase from the seller. Accordingly, the US target recognises gain on each of its assets and, if the US target is a corporation in the United States, there will generally be two levels of tax imposed - corporate income tax at the US target level and income tax at the shareholder level when the US target distributes the profits. The foreign acquirer, who may make a section 338(g) election without the consent of the seller, bears the tax cost of the election on the US target's return.2

The foreign acquirer's decision to make a section 338(g) election evaluates whether the net present value of the additional depreciation from the increased basis exceeds the tax cost.

In contrast to a section 338(g) election, the foreign acquirer may purchase the US target's shares and jointly make a section 338(h)(10) election with the seller.3 This is the best of both worlds, satisfying the seller's desire to sell shares and the foreign acquirer's desire to purchase assets. Accordingly, the only tax is on the sale of assets because the sale of shares is ignored for US tax purposes, while the foreign acquirer acquires the US target's assets with a fair market value tax basis. However, because the seller incurs the economic aspects of the tax, the foreign acquirer and the seller may typically negotiate a gross up of the purchase price for the additional tax from this election.

Use of a US holding company

If the foreign acquirer owns the shares of multiple US subsidiaries, the foreign acquirer should consider having a US holding company own the shares of the US subsidiaries.

Use of a US holding company is a good structure if the foreign acquirer anticipates operating in the United States for a long time and does not anticipate selling any of its US subsidiaries. Through the use of a US holding company, all the US subsidiaries will be part of a consolidated return and losses from one entity may offset gains from another entity.4

On the other hand, double taxation results when a US holding company sells a US subsidiary's shares and distributes the proceeds. …

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