Section 367 Tax Implications of US Property Transfers to Foreign Corporations

Section 367 Tax Implications of US Property Transfers to Foreign Corporations

Section 367 Transfers of Property from US to Foreign Corporations

How IRC 367 Transfers of Property from US to Foreign Corporations: One of the most important aspects of outbound transfers involves transfers from a US person to a foreign corporation. With outbound transfers, a major tax concern for the US government is that the IRS will not be able to collect tax on the non-recognized gain that has accrued on the property, which has been transferred abroad. While the tax rules in the US allow for deferred tax on transfers to US corporations — the rules are different when a foreign corporation is involved. Here’s a typical example: David has an asset he purchased for $400,000, has a Fair Market Value $3M. David transfers the asset abroad so that it is now in a foreign corporation and when the foreign corporation sells the asset — the IRS is unable to collect tax on the accrued gain. As a result, the Internal Revenue Code provides protection to the US government against these types of transfers — although there are some exceptions when transferring in certain scenarios to a foreign corporation. Let’s go through the basics of Internal Revenue Code 367:

26 USC 367

(a) Transfers of property from the United States

Here is how 26 USC 367 is broken down (in part):

(1) General rule

If, in connection with any exchange described in section 332, 351, 354, 356, or 361, a United States person transfers property to a foreign corporation, such foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation.

      • IRC Section 332: Complete liquidations of subsidiaries

      • IRC Section 351: Transfer to corporation controlled by transferor

      • IRC Section 354: Exchanges of stock and securities in certain reorganizations

      • IRC Section 356: Receipt of additional consideration

      • IRC Section 361: Nonrecognition of gain or loss to corporations; treatment of distributions

What does this Mean About 26 USC 367(1)? 

This code section refers to the fact that if an exchange occurs with respect to the code sections identified above, the foreign corporation is not considered a “corporation” for transfer purposes. The reason for this type of language is because when it is considered a US corporation, then the transfer is allowable without immediate tax implications.

(2) Exception For Certain Stock or Securities

      • Except to the extent provided in regulations, paragraph (1) shall not apply to the transfer of stock or securities of a foreign corporation which is a party to the exchange or a party to the reorganization.

What does this Mean About 26 USC 367(2)? 

There are some situations in which a US person is able to transfer US assets abroad and there will be no immediate tax consequence — but these are limited situations with very specific requirements.

(3) Special Rule for Transfer of Partnership Interests

      • Except as provided in regulations prescribed by the Secretary, a transfer by a United States person of an interest in a partnership to a foreign corporation in an exchange described in paragraph (1) shall, for purposes of this subsection, be treated as a transfer to such corporation of such person’s pro rata share of the assets of the partnership.

What does this Mean About 26 USC 367(3)? 

It means that unless something contradictory as provided in the Regulations, when a US person transfers a partnership interest to foreign corporation in an exchange identified in the above paragraph — it will be considered a transfer to a corporation (and may provide tax deferred treatment).

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