Characterization and Foreign Tax Credit Issues in Certain Post-Closing Integration Transactions

After a U.S.- or foreign-based multinational corporation (Multinational A) has acquired the assets or stock of another multinational corporation (Multinational B), it is extremely common for the management of Multinational A to seek to combine the domestic and foreign legal entities of the two multinationals. This process is often referred to as integration, because the transactions occur after Multinational A's acquisition of Multinational B has closed. Integration may be desirable from a managerial perspective, it may be part of an overall tax planning strategy or it may simply reduce the number of redundant legal entities in the world-wide structure. Whatever the motivation, due to the peculiarities of foreign tax regimes (described in detail in the article) one common post-closing integration technique is to sell the stock of the target corporation to a related acquiring corporation and then cause the target corporation to liquidate. As this article attempts to illustrate, it is important that taxpayers carefully consider the U.S. tax characterization of this type of transaction because the characterization of the transaction can dramatically alter the U.S. tax results.