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US Inbound: Tax-free reorganisation of public company subject to FIRPTA



Jim Fuller

David Forst

In private letter ruling (PLR) 201321007, the Internal Revenue Service (IRS) ruled that an inbound reorganisation of a publicly traded non-US corporation that indirectly held a significant amount of US real property would generally be non-taxable. The taxpayer had to comply with the tax rules involving non-US persons holding US real property, the Foreign Investment in Real Property Tax Act (FIRPTA) rules.

The parent (Parent) is a publicly traded non-US corporation whose sole asset is all the common stock of Sub, a US corporation.

The principal office of Parent is located in the US and all of its employees and the majority of its directors are US citizens or residents. As part of Sub's business, which is conducted solely in the US, it owns significant United States real property interests (USRPIs) and is therefore a United States real property holding corporation (USRPHC) under section 897(c)(2) of the Internal Revenue Code.

Parent proposed to reincorporate in the US by filing a certificate of domestication and a certificate of incorporation, pursuant to the laws of a certain US state.

Parent intends that the domestication will qualify as a reorganisation under section 368(a)(1)(F) (an F reorganisation). In connection with the F reorganisation, the stock in the US corporation (New Parent) constructively received by Parent and distributed by Parent to its shareholders in connection with the F reorganisation will be stock of a US corporation that is a USRPHC.

Parent represented that in general, the non-US shareholders of Parent who receive stock in New Parent would be subject to US tax on a subsequent disposition of the stock of New Parent under the FIRPTA rules.

Further, Parent represented that it would pay any taxes (plus interest) that section 897 would have imposed upon all persons who had disposed of interests in Parent as if it were a domestic corporation on the date of each such disposition, during the period beginning on the date that is 10 years before the date of the F reorganisation and ending on the date of the F reorganisation. Here, a public company exception provides that the stock of a publicly traded entity is treated as a USRPHC only in respect of shareholders owning a 5% or greater interest. See section 897(c)(3).

Section 897(d)(1) and Treas. Reg. § 1.897-5T(c) generally require that, if a foreign corporation makes a distribution of a USRPI to a shareholder, then the foreign corporation must recognise any gain (but not loss) on the distribution.

However, pursuant to the exception provided in section 897(d)(2)(A), gain is not required to be recognised by the foreign corporation if the requirements of Treas. Reg. § 1.897-5T(c)(4)(ii)(A) through (C) are satisfied, providing generally that the FIRPTA rules would apply on a subsequent disposition of the stock of the USRPI.

Pursuant to Notice 89-85, 1989-2 C.B. 403, as modified by Notice 2006-46, 2006-1 C.B. 1044, a non-US corporation will not be required to recognise gain on the distribution of the stock of a USRPHC if the foreign corporation pays an amount equal to any taxes that section 897 would have imposed on all persons who had disposed of interests in the foreign corporation, as if it were a domestic corporation on the date of each of such dispositions (the toll charge), during a 10-year look back period.

Here, the IRS ruled that Parent will recognise no gain or loss on the transfer of the Sub stock to New Parent in exchange for New Parent stock (which is a USRPHC), and because of the representation that the toll charge would be paid (subject to the publicly traded exception), it ruled that Parent will recognise no gain or loss on the distribution of the New Parent stock to its shareholders.

Jim Fuller (

Tel: + 1 650 335 7205
David Forst (

Tel: +1 650 335 7274

Fenwick & West


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