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CORPORATE RESTRUCTURING – A TRAP FOR THE UNWARY EXPAT

February 28, 2024

By Joshua Ashman, CPA & Nathan Mintz, Esq.

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For US expats with businesses abroad, it’s important to understand the US tax implications of your business structuring and operations.

In this week’s blog, we focus on corporate restructurings, which are ripe for misunderstanding and complacency, given that the foreign company rules in the US and in your country of residence can be significantly at odds.

In our experience, it’s not uncommon for a corporate structure to occasionally be reorganized, often at the advice of local counsel, in order to maximize the structure’s efficiency. While such a transaction may enjoy tax-free treatment under local rules, this may or may not be the case under US rules, or it may require additional IRS reporting in order to achieve tax-free status in the US.

It’s therefore critical to seek the advice of your US advisor in order to ensure that a contemplated restructuring is fully vetted from a global tax perspective.

Given the many complex and nuanced US tax rules regarding foreign companies and reorganizations, we thought it most instructive to touch on some of the rules that we encountered in a recent client case.

Corporate Restructuring – A Client Case Study

Background: Client is a US citizen who lives in France and runs technology businesses through based in the UK and France.

His business structure includes (1) a French holding company, and (2) its daughter UK company, which has been held directly by the Client (50%) and the French holding company (5%), with the remainder held by third-party investors.

In 2020, the Client was advised by a global law firm’s French office to transfer his direct shares in the UK company to the French company, which he did in share transfers made in 2020 and 2021. He was advised that this was highly advantageous from a French tax perspective.

He did not realize nor was he advised about the US tax implications and reporting requirements associated with the restructuring, including the triggering of tax on the built-in gain in the shares (which in the Client’s case, was valued at millions of dollars).

In reviewing the Client’s past returns and financial information, we discovered that the transfers had occurred, but the US tax implications were not considered, and the required reporting to the IRS had not been done.

Services and Solutions: In this case, our firm recognized the client’s need for both advisory and compliance tax services.

On the advisory side, we assisted with:

  • Corporate Restructuring Research – we advised the Client on the US tax reorganization rules that could be utilized in order for the Client to achieve tax-free treatment. This included, in brief, Section 351 of the Internal Revenue Code, which affords non-recognition treatment on transfers of property including shares to controlled companies, as well as Section 367 under which transfers that otherwise qualify for non-recognition treatment become taxable if made to a foreign corporation. In relevant part, Section 367 makes an exception, in the case of a transfer of foreign shares, either for less than 5% shareholders, or 5% shareholders who enter into a so-called gain recognition agreement (in brief, an agreement to keep the restructuring in place for 5 years) with the IRS.
  • Late Compliance Implementation Plan – we designed a detailed plan for reporting the transfers late to the IRS on amended returns, as well as submitting late gain recognition agreements, in order for the Client take the best position possible to qualify for tax-free treatment, despite the late submission. Importantly, this included the submission of robust and nuanced reasonable cause and non-willful explanation statements to best defend against the triggering of tax on the built-in-gain in the shares and potential penalties for the late submission.

On the compliance side, we assisted with:

  • Amending Past Returns – we reviewed the client’s previous tax returns and submitted amended returns, with revised Forms 5471 and Schedules O, as needed, to properly report the transfers.
  • Gain Recognition Agreements – we prepared and submitted gain recognition agreements (and annual GRA certifications), attached to the amended returns.
  • Penalty Defense Statements – we prepared robust and nuanced reasonable cause and non-willful explanation statements to best defend against the triggering of tax on the built-in-gain in the shares and potential penalties for the late submission.

The ETP Approach

At Expat Tax Professionals, we recognize the challenges that expats face, especially business owners who have to navigate multiple tax systems in order to operate tax efficiently. That is why we focus on being thorough, practical and efficient. Our personalized service simplifies the complex and offers creative solutions to ostensibly difficult situations.

In this regard, we take a two-pronged approach to expatriation servicing: First, our advisory services ensure that business operations and structuring are efficient both from a local and US tax perspective. Second, our compliance services ensure that the all reporting and disclosure requirements are met, both in the case of up-to-date filers and those who need to rectify a past mistake.

For more information on how we can help you and your business stay tax compliant and efficient, please contact us.

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