The IRS is proposing to ease the rules for corporate mergers under foreign law. A proposed amendment (REG-117969-00) to an earlier set of proposed regulations has a revised definition of a statutory merger or consolidation. The previously proposed definition of a statutory merger required that it be a transaction effected "pursuant to the laws of the United States or a State or the District of Columbia." It is changed to "pursuant to the statute or statutes necessary to effect the merger or consolidation." This change would allow a transaction effected pursuant to the statutes of a foreign jurisdiction or of a U.S. possession to qualify as a statutory merger or consolidation under Section 368(a)(1)(A), provided it otherwise qualifies as a reorganization.
The IRS also issued an accompany set of proposed rules (REG-125628-01) under Sections 358, 367, 884, and 6038B dealing with statutory mergers or consolidations under Section 368(a)(1)(A) involving one or more foreign corporations.
Both proposals are proposed to apply to transactions occurring after the date final regulations are published in the Federal Register.
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In a related development, the IRS announced in Notice 2005-6 that regulations will be amended to exempt foreign law mergers from application of Section 367(a). Specifically, Reg. 1.367(a)-3 will provide that an exchange described in Section 354 by a U.S. person of securities of a foreign corporation for stock or securities of the foreign corporation in a reorganization described in Section 368(a)(1)(E) will not be subject to Section 367(a).
It will also provide that an exchange described in Section 354 by a U.S. person of securities of a domestic or a foreign corporation for stock or securities of a foreign corporation pursuant to an asset reorganization described in Section 368(a)(1), that is not treated as an indirect transfer described in Reg. 1.367(a)-3(d), will not be subject to Section 367(a).
The regs will apply to transfers of securities after January 5, 2005. Until the regulations are issued, taxpayers may rely on this notice. They also may apply the notice to transfers of securities occurring on or after July 20, 1998 (the effective date of Reg. 1.367(a)-3(a)) and on or before January 5, 2005. They must do so consistently to all transactions within its scope.
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