Our US based C corporation is 100% owned by a US resident. The owner needs to transfer 100% of their shares to a foreign related corporation in another country. What would be the tax implications of transferring C corporation stock to a foreign entity?
There are certainly tax implications when transferring C Corporation stock ownership to a foreign entity which would be difficult to address without knowing all of the details. Having said that, we’ve highlighted our thoughts below.
First, we are concerned with IRC Section 367(a) as the purpose of the citation is to prevent the tax-free removal of property from US tax jurisdiction when the ability of the US to tax the profits from property cannot be preserved, even in cases when the transaction advances a business interest. In addition, IRC Section 367(a)(1) denies corporate status to the foreign transferee in Section 332, 351, 354, 356, and 361 exchanges when a U.S. person transfers property to a foreign corporation. Because corporate status is required by those provisions for the transaction to qualify for nonrecognition treatment, Section 367(a)(1) causes the transaction to be taxable by the U.S.
There are however two exceptions to the applicable IRC Section 367(a)(1), but each of them are subject to certain exceptions, and there are also exceptions to those exceptions which may negate their effect.
The first primary exception, the “stock or securities” exception, is found in Section 367(a)(2), which provides that, except as provided by regulations, Section 367(a)(1) does not apply to the transfer of stock or securities of a foreign corporation that is party to an exchange or reorganization. This exception would bode well for this specific situation. However, there are exceptions to this exception as per IRC Sections 332, 351, 354, 356, or 361. If the entity isn’t subject to those provisions, then it would be a nontaxable event. We would need to know more as this is a heavily complex topic.
If you have any questions, please do not hesitate to contact us.