The All Cash D Is Dead – Long Live the All Cash D - McDermott Will & Emery

The All Cash D Is Dead – Long Live the All Cash D

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Overview


In Depth


Tax Reform and All Cash D Reorganizations

With the introduction of global intangible low-taxed income (GILTI) as a new category of income of controlled foreign corporations (CFCs) currently taxable in the United States and a new participation exemption regime, tax reform has added several new wrinkles for taxpayers to consider when planning post-acquisition integrations of CFCs. Meanwhile, traditional rules regarding tax-free reorganizations were generally left untouched by tax reform. As explained below, while certain tax-free reorganizations are now dead for some purposes, they appear to have gained new life for others.

The All Cash D Is Dead

Prior to tax reform, many tax-free reorganizations were favored strategies for efficiently repatriating cash from CFCs owned by US parented multinational corporations. All cash reorganizations described in section 368(a)(1)(D) (All Cash D Reorganizations) were favored in part because they allowed a CFC to pay cash to its US parent corporation in exchange for the assets of a brother-sister CFC in a transaction that was entirely tax-free to the US parent. Because the new participation exemption regime generally exempts from tax dividends paid by CFCs to their US parent corporations, US parented multinational groups no longer need to engage in complicated repatriation planning involving tax-free reorganizations. As a result, All Cash D Reorganizations are much less relevant to cash repatriation planning for US parented multinational groups than they were before tax reform.

Long Live the All Cash D

Although tax reform has in many ways simplified cash repatriation planning, it has in many respects complicated post-acquisition integrations with respect to CFCs of US parented multinational groups.

Prior to tax reform, in post-acquisition integrations, transferring disregarded entities cross-chain in taxable sales was considered a default safe strategy for efficiently integrating most types of acquired foreign assets without triggering subpart F income. Section 304 transactions were also commonly used in integration transactions as the resulting deemed dividends generally did not give rise to subpart F income under section 954(c)(6). Now, however, each of these transactions can potentially result in US tax as a result of tax reform.

Taxable sales of assets between CFCs will generally result in GILTI income that is currently includible in the income of the US shareholders. Further, while the House bill and the Senate bill would have made section 954(c)(6) permanent, that proposal ultimately was not adopted as part of tax reform. As a result, section 954(c)(6) will expire for taxable years beginning on or after January 1, 2020, absent an extension. Once section 954(c)(6) expires, deemed dividends arising in section 304 sales will no longer be afforded pass-through treatment. While section 245A may potentially apply to exclude any such dividend from the income of the selling CFC, the dividend would be a per se extraordinary dividend under section 1059. Section 1059 can result in US tax if the untaxed portion of the dividend exceeds the selling CFC’s basis in the shares deemed redeemed in the section 304 sale.

An All Cash D Reorganization, on the other hand, generally will not result in either GILTI income or the application of section 1059. This is true despite the fact that these transactions are often economically very similar to either a sale of assets among CFCs or a section 304 transaction. As a result, structuring post-acquisition integrations of CFC assets as All Cash D Reorganizations may become the long-term low risk integration transaction of choice for minimizing US tax risk.