In the US, the 2017 Tax Cuts and Jobs Act (2017 Act) did not
make significant changes to laws surrounding mergers and
acquisitions (M&A). Consequently, one might believe that US
tax advisory for international M&A has remained the same
post-tax reform. However, the reality is very different. The
overhaul of basic US tax rules in 2017 significantly alters US
tax advisory considerations in cross-border M&A
transactions. This article examines a few of the prominent
issues facing US sellers and US buyers of foreign corporations
and business assets.
US seller considerations
Before the 2017 Act, US corporate sellers of controlled
foreign corporations (CFCs) generally held their operating CFCs
through a CFC holding company. These CFCs were sold using the
check-and-sell technique, as seen in the US Tax Court's opinion
in Dover Corp. v. Commissioner (122 TC 324, 2004).
According to this model, the target CFC would 'check a box'
in order to be treated as a disregarded entity for US tax
purposes. The CFC's holding company would then sell the
target's stock to the buyer. This sale would then be treated as
an asset sale for US tax purposes, and with limited exceptions,
would not generate Subpart F income. Consequently, the sale
would not have any immediate US tax consequences.
After the 2017 Act, the check-and-sell approach still
produces non-Subpart F income gains on the asset sale, as it
did before the Act, but the gain will be treated as tested
income that forms part of the US parent company's calculation
in its global intangible low-taxed income (GILTI).
Global intangible low-taxed income
The effect of having a higher GILTI-tested income will
depend on the amount of income earned by the US parent
company's CFCs in the year of sale, as well as the foreign
taxes paid on the combined income.
For instance, a US company whose CFCs pay foreign tax at a
blended rate of 20% might suffer no tax consequences, while a
US company whose CFCs pay foreign tax at a blended rate of 5%
might be subject to an immediate US tax on the additional
income, at the 10.5% effective rate for GILTI.
An alternative to the check-and-sell approach would be to
sell the target CFC's stock, without first making them 'check
In general, a stock sale would produce Subpart F income for
the CFC holding company, which is subject to an immediate 21%
US corporate tax rate. This Subpart F income could be offset by
an equivalent dividends deduction under §§ 964(e)(4)
and 245A of the code, but only to the extent the appreciation
in the target CFC's stock is attributable to earnings and
profits (E&P) not previously subject to US tax as Subpart F
income or GILTI.
Following US tax reform, it will not be easy for CFCs to
accumulate material amounts of non-taxed E&P. From 2019,
most CFCs and their E&P will be taxed as either Subpart F
income or GILTI. In either case, it will be subject to an
immediate US tax.
Taxpayers have considered resorting to self-help in this
regard. The US seller could contractually enforce a foreign
buyer to engage in a Section 338(g) election, which would treat
the target CFC as selling all of its assets prior to the sale
of its stock to the buyer. The election could be considered
helpful to the US seller but have no impact on the foreign
buyer. The election-triggered asset sale would produce an asset
gain and E&P in the target CFC, which generally would be
subject to US tax as GILTI-tested income.
Both a Section 338(g) election and a check-and-sell
transaction would see the US seller's gains be taxed at a lower
rate. Additionally, the inclusion of GILTI would see a spike in
the target CFC's stock immediately prior to the stock sale. As
a result, the CFC holding company would recognise a smaller
gain (or loss) on a sale.
A capital loss generated in this manner might be more
beneficial in situations where the target CFC is directly owned
by a US parent company. The capital loss would then arise in
the US tax return and this could be used to offset US capital
In the case of a Section 338(g) election, it might not be
possible to offset the US's 10.5% tax on the GILTI generated by
the election with excess credits. The uncertainty arises from
§ 338(h)(16) of the Tax Code, an obscure provision from
the 1986 Tax Reform Act that was designed for a more limited
In cases where the target CFC remains a CFC in the hands of
the buyer, the allocation of the target CFC's GILTI-tested
income in the year-of-sale raises novel questions. This
situation could also arise in the case of a sale to a US buyer
or in the sale to a foreign buyer with one or more US
Overall, the 2017 Act's repeal of § 958(b)(4) allows
for a 'downward attribution' of stock ownership from a foreign
parent company to its US subsidiaries. As a result, a CFC could
technically remain a CFC after a sale to a foreign
multinational buyer. However, the earnings of such a CFC would
generally not be taxable by a US subsidiary treated as its
owner by attribution.
It should be noted that the tax technical corrections bill
introduced by Representative Kevin Brady in January 2019 would
reinstate § 958(b)(4), and would introduce in its place a
more limited version of 'downward attribution'. These changes
are proposed to be retroactive, as if they were included in the
Private equity and venture capital
CFCs owned by non-corporate investors (such as venture
capital or private equity) will face significant issues on
exit. If a buyer were to make a Section 338(g) election, the
sellers' anticipated capital gain on sale (which is already
taxed at a 20% rate), would be converted to GILTI ordinary
income and taxed at a 37% rate.
The proposed § 250 regulations issued in March 2019
have helpfully extended the 50% GILTI deduction to individuals
electing under § 962 to be taxed like corporations on
their GILTI. However, in these circumstances, the § 962
election would not provide a higher value for sale.
Furthermore, the election is only available to 10% US
shareholders who are deemed individuals.
US buyer considerations
Prior to the 2017 Tax Act, US buyers of foreign target
companies routinely made Section 338(g) elections to obtain a
higher value in the target's assets. After the Act, US buyers
will continue to have incentives to make the election. The
higher value will increase depreciation and amortisation
deductions, resulting in reduced amounts of GILTI-tested
Qualified business asset investment
The higher value will also materially increase the amount of
qualified business asset investment (QBAI) if the target has
substantial tangible property, which will result in a reduced
GILTI inclusion for the US parent company. GILTI is generally
calculated as the net tested income of all CFCs, minus the 10%
return on the QBAI of all CFCs with tested income.
As is the case with US sellers, the importance of reducing
GILTI may vary depending on the US buyer's circumstances. A US
buyer that sees their CFC earn a substantial tested income at a
blended foreign tax rate of 5% will be strongly incentivised to
limit further GILTI inclusions.
However, for a US buyer that sees their CFC earn tested
income that is taxed at a higher foreign rate of 20%, the
incentive to reduce GILTI will remain, but will not be as
strong. In this case, the higher foreign taxes might offset the
impact of the increased GILTI inclusion.
Unlike other foreign tax credit baskets, excess credits in
the GILTI basket cannot be carried back or forward to other tax
years. Reducing the GILTI in these circumstances might only
produce marginal US tax benefits by reducing expense
allocations to GILTI basket income.
In certain cases, enhanced depreciation and amortisation
deductions resulting from a Section 338(g) election could push
the acquired CFC into a tested loss. This tested loss would
favourably reduce GILTI inclusions by offsetting other CFCs'
tested income, but it also would result in a loss of QBAI and
possibly a loss of foreign tax credits.
Only the QBAI of a CFC with tested income is taken into
account in the 10% return calculation for GILTI. Similarly,
only foreign taxes of a CFC with tested income are taken into
account as foreign tax credits in the GILTI calculation,
already after reducing them by the 20% haircut of §
As discussed above, US sellers may have incentives to
prevent buyers from making a Section 338(g) election. In
situations where a transaction involves the sale of a CFC by a
US seller to a US buyer, there could be substantial
negotiations around making the Section 338(g) election. Without
a special provision in the purchase agreement, the election is
at the unilateral option of the buyer.
Base erosion and anti-abuse tax
Another material issue for certain US buyers is the special
payment rule in the proposed BEAT regulations. The preamble
expresses the view that a tax-free § 332 liquidation of a
CFC into its US corporate parent gives rise to a BEAT
The US parent, which surrenders its stock in the CFC during
the liquidation, is deemed to have made payment for the CFC's
assets in liquidation. This extension seems farfetched, and it
is hoped that the final regulation will take a more measured
view of the scope of an outbound payment.
US tax reform implications for M&A
While taxpayers await clarification on final BEAT
regulations, US buyers may wish to reconsider traditional
acquisition methods involving the purchase of a foreign target,
and enlisting both a Section 338(g) election and a
check-the-box election for the target.
Prior to the 2017 Tax Act, the aforementioned techniques
allowed US buyers to amortise the purchase price of the
acquisition against US taxable income, but at the expense of
bringing all of the target's intangible assets into the
Until the BEAT regulations become final, US buyers might
consider alternative acquisition structures that achieve the
same effect without raising potential BEAT issues.
Financing issues will also take on a different character and
tone. The 2017 Act imposed numerous disincentives regarding
interest deductions on hybrid debt. Between US tax rules and
the EU rules under the Anti-Tax Avoidance Directive II (ATAD
II), hybrid debt is more likely to create issues than to solve
After 2017, it should be less important to use foreign cash
to fund foreign acquisitions than it was before. In theory, the
2017 Act allows for tax-free repatriation of foreign cash,
either under the new § 245A dividends received deduction,
or as previously taxed earnings and profits (PTEP).
However, PTEP gives rise to currency gains or losses during
repatriation under Code § 986(c). This may also create
basis issues as it is distributed through a chain of foreign
US borrowings could still be used to achieve US and foreign
tax deductions, but at the cost of an increased tax basis in
CFC stock. This would also see a possible limitation under the
new § 163(j) rules, particularly after 2022 when adjusted
taxable income will be reduced by depreciation and amortisation
so that it resembles earnings before interest and tax (EBIT)
rather than earnings before interest, tax, depreciation and
amortisation (EBITDA). The Treasury and the IRS have also
indicated a possible concern with this kind of double-dip in
the pre-amble to hybrid debt regulations.
US buyers of partnership interests should also be mindful of
the new withholding rule under Section 1446(f). Unless it
receives certain certifications, the buyer of a partnership
interest may be required to withhold and pay 10% of the
purchase price to the IRS if the partnership is engaged in a US
business. The partnership can also be held liable if the buyer
fails to withhold.
This article was written by Adam Halpern and William
Skinner of Fenwick & West.
Chair, tax group
Fenwick & West
Tel: +1 650 335 7111
Adam Halpern is the chair of the tax group at Fenwick
& West. His practice focuses on the US federal
income taxation of international transactions. He
regularly advises on the taxation of cross-border
operations, acquisitions, dispositions and
restructurings. He has successfully represented clients
in federal tax controversies at all levels.
Adam is a lecturer in law at Stanford Law School,
teaching classes in international tax, and is a
frequent speaker at the Tax Executives Institute (TEI)
and Practising Law Institute (PLI).
Adam is recognised as a leading tax lawyer by
Euromoney's World's Leading Tax Advisors, International
Tax Review and Chambers USA. He also appears in
ITR's Tax Controversy Leaders guide.
The Fenwick & West tax group has advised over
100 Fortune 500 companies on tax matters, and has
served as counsel in more than 150 large-corporate IRS
Appeals proceedings and more than 75 federal court tax
cases. Recent published cases include Analog
Devices, Inc. v. Commissioner, 147 T.C. No. 15
(2016), CBS Corp. v. United States, 2012-1
U.S.T.C. ¶50,346 (Fed. Cl.), and the landmark
Xilinx, Inc. v. Commissioner, 125 T.C. 37
(2005), aff'd, 598 F.3d 1191 (9th Cir. 2010),
described by the Wall Street Journal as "the biggest
tax case in the last 20 years".
Fenwick has been named San Francisco Tax Firm of the
Year and US Tax Litigation Firm of the Year numerous
times by International Tax Review.
Adam graduated summa cum laude from the
University of California, Hastings College of the Law,
and has an AB in philosophy from Princeton
He is a member of the State Bar of California.
Partner, tax group
Fenwick & West
Tel: +1 650 335 7669
Will Skinner focuses his practice on US corporate and
international taxation. His practice encompasses
international tax planning, tax controversy and M&A
In his tax planning practice, he develops and
stress-tests customised tax planning to meet client
objectives. He has significant experience representing
both outbound and inbound taxpayers, and regularly
deals with international tax issues such as Subpart F,
foreign tax credits, transfer pricing (TP) and
international M&A/restructurings. He regularly
represents corporations in IRS audits, appeals and
other tax controversies (including litigation).
In his transactional tax practice, Will has
experience advising on a wide range of sophisticated
corporate transactions, such as M&A, tax-free
reorganisations, financings and restructurings.
Will has been recognised by California Super Lawyers
and in Euromoney's expert guide as one of the World's
Leading Tax Advisors. He regularly presents at industry
educational programmes, such as Bloomberg BNA,
Strafford, TEI and IFA events. He has taught
international tax at San Jose State University and at
the University of California, Berkeley, School of Law.
A prolific writer, Will has published numerous
articles, including in the Journal of Taxation, Journal
of Corporate Taxation, International Tax Journal and
Practicing Law Institute's Corporate Tax Practice
Series. He is the author of a treatise on cross-border
spin-offs for RIA's Checkpoint Catalyst.
Will graduated with a juris doctor, with
distinction, from Stanford Law School in 2005, where he
was a member of the Stanford Law Review. He
received a BA in history in 2001 from the University of
Will is a member of the State Bar of California.