U.S. Tax Implications of U.S. Holding Companies for Foreign Acquirers
Foreign investors seeking new business opportunities in the United States generally have some flexibility when deciding how to structure the acquisition of an ongoing business. While there are many considerations in addition to the potential tax liability involved, one of the most common questions is whether to use a U.S. holding corporation as part of the structure.
The threshold of the matter, as it is generally the case for investments, is how long the foreign investor expects to hold such U.S. business. If the foreign investor expects to hold the business for a long-term, using a U.S. holding corporation (“Holdco”) may be beneficial. If the foreign investor expects to sell part or all of the U.S. business in the short term, a Holdco can result in adverse tax consequences.
For long-term investments, having the acquisitions structured using a Holdco will result in a beneficial outcome since the foreign investor will avail himself or herself to the benefit of consolidating at Holdco’s level, (See Image 1). If using a Holdco, Holdco can file a consolidated tax return in the U.S. for four U.S. entities (itself and its three subsidiaries). For example, Holdco may benefit from its consolidated tax return by applying losses from the Delaware Subsidiary to offset the income of the Texas Subsidiary.
On the other hand, if the foreign investor is looking for a short-term opportunity and expects to dispose of any of the subsidiaries in the near future, using a Holdco will result in a negative outcome. Holdco would have to recognize gain on the disposition of a Subsidiary, resulting in earnings and profits (“E&P”) for Holdco that will be subject to income tax, in addition to a dividend withholding tax for Foreign Corp., unless reduced or eliminated by a tax treaty.
If the foreign investor is planning on selling one of the operating subsidiaries in the short-term, it is recommended that the investment be structured by having the Foreign Corp. directly owning the shares of the U.S. business without any Holdco involvement (See Image 2). In this case, and assuming that a U.S. Subsidiary is not a foreign property holding corporation, if Foreign Corp. sells the shares of any of the Subsidiaries, there will be no tax liability in the U.S., and the Foreign corp. will avoid any issues dealing with E&P and dividends from a U.S. entity
Please note that for this article's context, "long-term" periods refer to one year or more, and "short-term" periods refer to less than one year.
Barbosa Legal can help. Contact at jbarbosa@barbosalegal.com; igarcia@barbosalegal.com; or ahernandez@barbosalegal.com to schedule an assessment if you are planning on acquiring a business in the United States.
