U.S. Treasury Issues Regulations Affecting Taxes on Cross-Border Mergers

Last week, the U.S. Treasury issued proposed regulations that for the first time would allow tax-free treatment for cross-border mergers organized under foreign law. These regulations, if adopted, will put non-U.S. corporations on more equal footing with U.S. corporations in structuring tax-free acquisitions of target U.S. corporations. Under the current rules, a non-U.S. acquiring corporation generally cannot use cash or other “boot” (including assumed liabilities) totaling more than 20% of the acquisition price in acquiring a U.S. target corporation on a tax-free basis, and in many cases, is not able to use any cash or other boot. Under the proposed regulations, a non-U.S. acquiring corporation will be able to structure a tax-free merger transaction on the same basis as a U.S. acquiring corporation, paying 50% or more of the consideration for a U.S. target corporation as cash or boot, with the remainder of the consideration consisting of the acquiring corporation’s stock.

The proposed regulations also would make changes to many other rules relating to cross-border or non-U.S. merger transactions. Among other changes, the proposed regulations provide helpful clarification of the ways in which entities that are disregarded for U.S. tax purposes can be used in structuring tax-free transactions, and a related notice extends the application of tax-free reorganization rules that had previously only applied to non-U.S. corporation stock to non-U.S. corporation “securities” generally, thus including many debt instruments.

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