If the buyer is foreign and the three CFCs lose their status as CFCs, the seller will report any Subpart F income (21 percent tax rate) and GILTI (10.5 percent tax rate) for the portion of the year prior to the sale. This is determined by taking into account the income of the three CFCs for the entire year and then prorating it between the pre-sale and post-sale period. The current year earnings taxable under Subpart F would correspondingly reduce the amount of gain and replace the non-taxable dividend portion of the gain. Again, transactions engaged in by the buyer following a sale could affect the amount of the Subpart F inclusions, and therefore should be addressed in the sales agreement.
In summary, the US tax costs of selling stock in a CFC generally will be significantly less for a domestic corporation beginning in 2018 as a result of the increase in the tax basis in the stock being sold from undistributed previously taxed earnings and the 100 percent deduction of the dividend portion of the gain. The sales agreement should address transactions after the sale that can affect the tax results to the seller as well as the allocation any Subpart F income or GILTI during the year of the sale. In addition, as will be discussed in a subsequent Insight, a section 338 election by the buyer can materially impact the seller’s consequences described above, which should also be addressed in the sales agreement.