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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

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Lost in Translation: Treatment of Foreign-Law Demergers Under U.S. Federal Tax Law

At a certain point in the life of a corporation that operates more than one business, management may wish to separate the different businesses into two or more separate corporate entities. In most cases, demergers are structured based on the requirements of the corporate law in the place of domicile of the corporation. Typically, a demerger of a foreign corporation that follows the corporate law provisions of applicable foreign law would also be exempt from tax in the relevant country. However, when one of the shareholders is a U.S. individual or corporation, U.S. Federal tax considerations should be taken into account to prevent unexpected U.S. tax for a U.S. investor. Demergers are given tax-free treatment under U.S. tax law only if the requirements of Code §355 are met. If not met, both the corporation that undergoes the demerger and its shareholders recognize gain in connection with an actual or deemed distribution of appreciated property. While the foreign corporation may have no U.S. tax to pay, the U.S. investor may find that tax would be due in the U.S. if the foreign corporation undergoing the demerger is a C.F.C. Stanley C. Ruchelman and Daniela Shani explain the various categories of tax free demergers under U.S. tax concepts and the consequences of failing to meet the requirements in the context of a corporation formed outside the U.S.

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

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Taxation in India and the U.S.: Stages in the Life of a U.S. Owned Indian Company

When a U.S. corporation expands its operations to India and forms an Indian subsidiary, tax issues need to be addressed in both countries at various points in time – when the investment is first made, as profits are generated, as funds are repatriated, and when the investment is sold. In their comprehensive article, Sanjay Sanghvi, a partner of Khaitan & Co., Mumbai, Raghav Jumar Baja, a principal associate of Khaitan & Co., Mumbai, Stanley C. Ruchelman and Neha Rastogi explain all facets of tax planning in both countries at each stage of the investment and do so in an integrated way.

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Portuguese Taxation of Distributions from Trust Capital: A Critical Assessment

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Portuguese Taxation of Distributions from Trust Capital: A Critical Assessment

How does a country adopt a law to tax the income of an entity that generally is not recognized under local law? In Portugal, there is room for improvement. The 2014 reform of the Portuguese Personal Income Tax ("P.I.T.") Code introduced certain taxing provisions that specifically address "fiduciary structures," the Portuguese term for trusts. Two separate categories of payments were established for purposes of imposing tax. Under the first category, all amounts paid or made available to a Portuguese tax resident are taxable. This includes capital distributions. Under the second category, gains realized by the taxpayer who formed the fiduciary structure are taxed at the time of a final distribution incident to the structure’s liquidation, unwinding, or termination. Other beneficiaries can receive liquidation distributions without suffering any tax. João Luís Araújo and Álvaro Silveira de Meneses of Telles Advogados, Porto and Lisbon, Portugal, suggest that solid arguments support the view that certain distributions should be seen as outside the scope of the P.I.T. Code, including (i) distributions of trust capital to the settlor during the ongoing existence of a trust and (ii) distributions to non-settlors that are akin to gifts.

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German Supreme Tax Court Rules in Favor of Taxpayer – U.S.-German Repatriation Non-taxable

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German Supreme Tax Court Rules in Favor of Taxpayer – U.S.-German Repatriation Non-taxable

In a recent decision, the German Federal Tax Court (Bundesfinanzhof or "B.F.H.") held that repayment of capital by a U.S. subsidiary to its German parent company is not taxable in Germany. While this decision is in line with prior caselaw, it is significant because the B.F.H. held that domestic rules apply when determining the extent to which a distribution by a non-E.U. subsidiary to its German parent comes from profits and the extent to which it comes from capital. Because the participation exemption rules under German law exempts only 95% of the dividend through a disallowance of deemed expenses, tax is due on the 5% of the distribution that is attributable to earnings. Under the decision, two factors control the treatment of a distribution from a non-E.U. country: (i) the domestic accounting or corporate law treatment of the residence country and (ii) the ordering rules under German tax law. Beate Erwin and Nina Krauthamer explain the decision and how it interfaces with the ordering rules of U.S. domestic law under which distributions care treated as dividends, return of capital, and capital gains.

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I.R.S. Breaks the Silence with Rev. Rul. 2017-09, Issues Guidance on “North-South” Transactions

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I.R.S. Breaks the Silence with Rev. Rul. 2017-09, Issues Guidance on “North-South” Transactions

In Rev. Rul. 2017-09, the I.R.S. addressed “north-south” transactions.  In these transactions, a shareholder transfers property to a corporation in a transaction structured to be free of tax under Code §351.  At about the same time, the corporation distributes shares of its subsidiary to the shareholder in a spinoff.  If the transactions are considered separate for income tax purposes, each can be effected free of gain recognition and the imposition of income tax.  On the other hand, if the transactions are integrated into a single multi-step transaction, gain will be recognized and tax imposed on each step of the arrangement.  The ruling announces that the I.R.S. will once again rule on the status of these transactions and provides guidance on the standard that the I.R.S. will apply.  Rusudan Shervashidze and Nina Krauthamer explain the factual context and the approach of the I.R.S. in granting relief.

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Purchasing a Partnership/LLC Interest: Tax Tip #1–Requiring Tax Distributions→

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Published by the American Bar Association in the Real Property Trust & Estate eReport, May 2015.

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Corporate Matters: Limited Liability Company Agreements

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In a previous issue, we discussed shareholder agreements and set out items that one should look for in such an agreement. A related topic, but one with subtle differences – particularly on the tax side – concerns the agreements used to govern the management and operation of limited liability companies. In the Delaware Limited Liability Company Act, these agreements are referred to as “limited liability company agreements,” and in the New York Limited Liability Company Law, they are referred to as “operating agreements.” In practice, however, the terms are used interchangeably. For purposes of this article, we will use limited liability company agreement (“L.L.C. Agreement”), as Delaware is the state most frequently used for limited liability company formation.

STATE REQUIREMENTS

Although many states do not require a limited liability company to have an executed L.L.C. Agreement, it is prudent to outline the internal governance procedures of the entity in a legal document. There really is no reason why the members of a limited liability company should not have a functioning governing document. An L.L.C. Agreement does not necessarily have to be a long or complicated document; it will allow you to effectively structure your financial and working relationship with your co-owners in a way that is suited to the type of business you are engaged in. Furthermore, having an agreement will help protect your limited liability status, particularly for single-member limited liability companies, as well as prevent management disagreements and ensure that the business is governed by rules of your making, rather than as stipulated by a particular state statute.

Care should be taken in drafting the agreement, however, as although many statutes provide a lot of discretion for members of a limited liability company to define the terms of their relationship – state statutes contain fundamental governing provisions that members of a limited liability company can contract out of – courts have relied on the plain language contained in the contracts and have resisted creating ambiguities based on extrinsic evidence.