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International Tax Advisory - IRS Allows Gain Recognition Agreements (GRA) on Cross-Border Stock Transfers

Thursday, May 17, 2012 - Alfredo J. De Zayas, CPA & Boris Rosen, CPA

Alfredo J. De Zayas

Boris Rosen

The IRS has begun to permit U.S.persons to enter into Gain Recognition Agreements (GRA) on cross-border stock transfers of commonly owned corporations. In a GRA, the transferor can eliminate the requirement for it to pay U.S. taxes on its built-up gains from the stock.

The IRS announced that change in Notice 20121-15. It is effective for eligible transactions occurring on or after February 10, 2012.

Prior to that Notice there was a requirement under Section 367 of the U.S. tax code for U.S. persons to recognize the entire built-in gain of a cross-border transferred stock, not just the dividend portion, under certain circumstances. Moreover, under regulations the IRS issued in 2009, the U.S. person could not file a GRA to defer gain recognition.

The recent change could prove beneficial to some U.S. corporations in their stock transfers with foreign subsidiaries since they (U.S. corporations) may be eligible for a GRA.

In a GRA, the transferor is not required to pay U.S. taxes on gains from the transfer of stock unless the transferee disposes of the stock within five years or unless certain other events occur.

In the Notice, the IRS said it is amending Section 367 to provide uniformity to cross-border stock transfers by U.S. persons (independent of the amount of income taken under Section 304) and substantially reduce the complexity and uncertainty of filing a GRA.

The purpose of Section 304 is to prevent the bailout of earnings and profits as disguised sales (i.e. recoupment of basis), while retaining complete control of both the Target Sister Corporation and Buyer Brother Corporation after the purported sale. In such a transaction the Parent Corporation's stock ownership percentage does not diminish after the sale.

Section 367(a) generally requires US persons to recognize gain on certain transfers of stock or other property to foreign corporations as a toll charge before the stock or other appreciated property leaves U.S. taxing jurisdiction. U.S. persons, if they otherwise qualify, are permitted to avoid this toll charge by entering into GRAs with the IRS.

In a Section 304, one of the fictional steps that are deemed to occur is the contribution of stock under Section 351 to a foreign corporation. Under Notice 2012-15, these types of Section 304 transfers (Section 351 contribution) are now subject to Section 367(a) provisions, which but for the GRA would require the U.S. transferors to recognize gain on the difference between the value of the transferred stock and its basis (i.e. as if the U.S. person had sold the stock).

If you would like additional information on Gain Recognition Agreements and other accounting treatments for cross-border stock transfers, do not hesitate to contact our International Tax specialists or call us at 1-800-239-1474.