Sales Transactions of Controlled Foreign Corporation Stock: Avoiding Tax Impact For Buyers and Sellers

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Sales transactions of CFC stock shares can create unforeseen and costly tax consequences for both purchasers and sellers of CFC shares. Tax counsel structuring purchase transactions must be aware of available tax benefits and possible tax costs in exchanges of CFC stock.

Buyers of CFC shares generally may make an election under IRC Section 338(g) to treat the purchase as a formation of a new foreign corporation that has acquired all assets and assumes all liabilities of the foreign target.

This allows the purchaser to take a step-up of the assets to fair market value, avoiding any U.S. tax costs with the election and boosting the value of foreign tax credits due to the basis differential between the U.S. and the country where the CFC is located. However, Section 901(m) serves to limit those credits, and tax counsel must grasp the impact of the foreign tax credit limitation.

For sellers of CFC shares, Section 1248 can have a dramatic tax impact on the U.S. treatment of sale gains. The Section 1248 rules require a seller to treat gain recognized on the sale or exchange as a dividend under certain conditions.​

However, Section 1248(b) limits the impact of the dividend recharacterization on a covered sale. But, this provision applies only to sales of stock in a CFC located in a country that does not have a bilateral income tax treaty with the United States.

Where CFC shares are owned in a partnership interest, the sale of that partnership share can create still further complexities for the taxpayer in determining treatment of the sale gain. Tax counsel must have a thorough understanding of the tax treatment of CFC sale gains to avoid costly tax consequences.

Listen as our experienced panel provides a thorough and practical guide to structuring tax-efficient purchases and sales of CFC shares.​​