On August 19, the IRS released Notice 2025-45 (the “Notice”), announcing its plan to reduce barriers to certain redomiciliations. In particular, the IRS reduced barriers to redomiciliations by foreign publicly traded corporations to the United States by limiting the circumstances in which certain provisions of the Foreign Investment in Real Property Tax Act (“FIRPTA”) would tax such transactions. In addition, the IRS proposed certain changes to the regulations regarding tax-free reorganizations under section 368(a)(1)(F) (“F reorganizations”) to make it easier for redomiciliations by publicly traded corporations to qualify as F reorganizations when stock is actively traded during the effectuation of the redomiciliation.
FIRPTA
Background
FIRPTA requires a non-U.S. person disposing of a U.S. real property interest (a “USRPI”) to recognize gain or loss on such disposition as if the non-U.S. person were engaged in a trade or business within the United States. For this purpose, a USRPI includes an interest in a domestic corporation that qualifies as a “U.S. real property holding corporation” (a “USRPHC”). A USRPHC is a domestic corporation if the fair market value of its USRPIs, at any time during a 5-year look-back period, equals or exceeds 50 percent of the sum of the fair market value of (i) its USRPIs, (ii) its real property interests located outside of the United States and (iii) its assets used or held for use in a trade or business.
In the case of any class of stock of a domestic public corporation that is regularly traded on an established securities market, a non-U.S. person will only be treated as owning a USRPI with respect to such class of stock if such person has owned more than 5% of the class of stock during a 5-year look-back period (the “5% Shareholder Rule”).
In certain circumstances, the FIRPTA regulations disallow tax-free treatment to transfers of USRPIs in transactions otherwise qualifying as tax-free. In general, these regulations require recognition of gain on a distribution of a USRPI that otherwise qualifies as tax-free, even where the distribution is only one step of a transaction otherwise qualifying as a tax-free reorganization (the “Distribution Recognition Rule”). The FIRPTA regulations also disallow tax-free treatment on the transfer of a USRPI unless the USRPI is exchanged for an interest the sale of which would itself be subject to tax, generally another USRPI (the “Subject-to-Tax Rule”).
Existing temporary regulations and prior notices provide for certain limited exceptions to gain recognition under the Distribution Recognition Rule. In particular, in the case of distributions by a foreign corporation in certain reorganizations, the Distribution Recognition Rule will not apply if (i) the foreign corporation pays an amount equal to any taxes that would have been imposed under FIRPTA on all persons who disposed of interests in the foreign corporation within a 10-year look-back period, as if it were a domestic corporation on the date of disposition, (ii) the exchanging shareholder in the reorganization would be subject to U.S. taxation on the subsequent disposition of stock of the domestic corporation received in the reorganization, and (iii) the distributing foreign corporation complies with certain FIRPTA filing requirements. As a result, the foregoing exceptions may reduce, but do not eliminate, the imposition of tax under FIRPTA in inbound F reorganizations.
Accordingly, consider the redomiciliation of a publicly traded foreign corporation (“FC”) to the United States in an F reorganization. The F reorganization could take a variety of different forms under local law, but for U.S. federal income tax purposes, the assets and liabilities of FC will be transferred to a newly formed domestic corporation (“DC”) in exchange for DC shares, and FC will be considered to distribute the shares of DC to its shareholders in complete liquidation. Provided the F reorganization requirements are satisfied, the Code would generally allow for tax-free treatment on this transaction. However, if DC is treated as a USRPHC, the Distribution Recognition Rule would result in a tax on the distribution by FC of DC shares to the extent any shareholders of FC would not be subject to tax on a subsequent disposition of DC shares, for instance, because they are non-U.S. persons subject to the 5% Shareholder Rule. Even if all the shareholders of FC would be subject to tax on a subsequent disposition of DC shares, FC could only avoid gain recognition if it pays tax on all previous dispositions in the 10-year look-back period that would be subject to FIRPTA if FC were a domestic corporation and if FC undertakes burdensome filing requirements.
Alternatively, if DC were not a USRPHC in the above example, but FC holds stock of a domestic subsidiary that is a USRPHC (and thus a USRPI) that is transferred to DC in the F reorganization, FC would be subject to tax on the exchange of the stock of the domestic subsidiary for stock of DC in the F reorganization pursuant to the Subject-to-Tax Rule because FC would not receive a USRPI in exchange for a USRPI.
Relief under the Notice
To reduce impediments to redomiciliations of publicly traded foreign corporations to the United States, the Notice previews new FIRPTA regulations to be issued with respect to “covered inbound F reorganizations.” A “covered inbound F reorganization” is an F reorganization in which the transferor corporation is a publicly traded foreign corporation and the resulting corporation is a publicly traded domestic corporation. To be considered “publicly traded,” the corporation’s principal class of stock must have been regularly traded on an established securities market at all times during the three-year period immediately prior to the completion of the F reorganization. The Notice further describes each aspect of the publicly traded definition.
In addition, a transaction will fail to meet the requirements of a covered inbound F reorganization if, pursuant to a plan (or series of related transactions) and in connection with the F reorganization, the resulting domestic corporation transfers any property (other than money) to any of its shareholders with respect to the shareholder’s stock in the resulting domestic corporation.
Transactions qualifying as covered inbound F reorganizations will be eligible for the following relief under the FIRPTA nonrecognition rules:
- The 5% Shareholder Rule will be extended to publicly traded foreign corporations for purposes of applying the Distribution Recognition Rule in inbound F reorganizations. Thus, in our example, if FC elects to pay tax on prior distributions during the applicable 10-year look-back period instead of paying tax on the distribution of DC stock, it would only need to take into account dispositions by non-U.S. persons who were 5% shareholders during the applicable look-back period. Non-U.S. persons who own 5% or more of the stock of FC in a covered inbound F reorganization remain generally subject to tax under the Distribution Recognition Rule in the absence of such an election. However, non-U.S. persons who own less than 5% of the stock of FC before the inbound F reorganization will be treated as satisfying the requirement of being subject to tax on a future disposition of DC stock so that they will not be taxed under the Distribution Recognition Rule.
- The filing requirements that apply where a foreign corporation elects to pay tax on previous dispositions instead of upon its distribution of USRPHC stock are relaxed such that the filings need only be made with respect to distributees of the resulting corporation stock that the foreign corporation knows or has reason to know were 5% shareholders during the applicable period.
- The transfer by a foreign transferor corporation of a USRPI to a resulting domestic corporation in exchange for stock of the resulting domestic corporation that is not a USRPI will generally qualify for tax-free treatment in a covered inbound F reorganization, and the Subject-to-Tax Requirement shall not apply to such transactions. However, the foreign transferor corporation must nonetheless satisfy certain filing requirements. Therefore, in the alternative example described above, FC would not be subject to tax on the transfer of USRPIs to DC in the F reorganization, including the transfer of the stock of a domestic subsidiary treated as a USRPHC, provided it satisfies the filing requirements.
The proposed regulations will apply to transactions occurring on or after August 19, 2025, and taxpayers may rely on the rules described in the Notice before such regulations are published.
F Reorganization
Background
For a redomiciliation to qualify as an F reorganization, shareholders must own the same percentages of the transferor corporation and the resulting corporation at the beginning and end of the potential F reorganization (the “Identity of Stock Ownership Requirement”). The ‘potential F reorganization’ is a concept first created by the F reorganization regulations to aid in determining which steps should be considered when applying the F reorganization requirements to a multi-step transaction. The F reorganization regulations provide that the potential F reorganization begins when the transferor corporation begins (or is deemed to begin) transferring its assets to the resulting corporation and ends when the transferor corporation has distributed (or is deemed to have distributed) to its shareholders the consideration it receives from the resulting corporation and has completely liquidated for federal income tax purposes. In the case of a publicly traded corporation, if time elapses between the first step and the last step of the potential F reorganization, public trading of stock of the corporation could prevent it from satisfying the Identity of Stock Ownership Requirement.
Relief under the Notice
The Notice removes the uncertainty of applying the Identity of Stock Ownership Requirement to potential F reorganizations involving publicly traded corporations. To clarify the effects of dispositions of stock unrelated to the F reorganization, the Notice announces proposed regulations that would allow taxpayers to disregard dispositions of stock of the transferor corporation and the resulting corporation if the disposition is not included in the plan of reorganization. The forthcoming proposed regulations will include an operative rule as well as an example. The proposed regulations will apply to transactions occurring on or after August 19, 2025, and taxpayers may rely on the rules described in the notice before such regulations are published.
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