Question

USCo incorporated its foreign branch operations in Italy by transferring the branch's assets to a foreign corporation in return solely for stock in the new corporation. All of the branch's assets are located outside the United States and are used in the active conduct of a foreign trade or business. Is this transaction eligible for tax deferral under $351 ?

Answer 1

The transfer of foreign assets by USCo to a new corporation in exchange for stock might be eligible for tax deferral under Section 351 if the foreign assets are used in an active trade or business and other control requirements are met. Nonetheless, the complex international tax provisions such as Subpart F and GILTI may affect the outcome. This reflects the broader debate on the economic impact of multinational corporations' international operations.

Step-by-step explanation:

The transaction described where USCo transfers the assets of its foreign branch in Italy to a new corporation in exchange for stock may be eligible for tax deferral under Section 351 of the Internal Revenue Code. Under Section 351, no gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange such person or persons are in control of the corporation. In this case, the assets are used in the active conduct of a foreign trade or business, which may fulfill the requirement for a valid 351 exchange.

However, specific conditions and limitations apply, including the fact that the tax treatment of international operations and transactions can be quite complex due to other provisions of the tax code and international tax agreements. For instance, Subpart F rules or Global Intangible Low-Taxed Income (GILTI) provisions may affect the deferral of income. Professionals often evaluate the presence of active trade or business, control requirements, as well as the potential impact of these other provisions on the deferral eligibility.

Additionally, it is important to consider that while overseas operations of multinational corporations may not be directly taxed by the US, these corporations often contribute to the US economy. Advocates of globalization argue that international operations lead to benefits like lower consumer goods prices and dividends for US investors. Nonetheless, critics argue against the potential overseas job transfer and the avoidance of a fair share of US taxation.