Can “Knowhow” Constitute Property in Exchange for Stock of a Foreign Corporation Under a Section 351 Tax-Free Exchange?
By Anthony Diosdi When a U.S. corporation making a direct investment in a foreign corporation contributes intangible property rights to the enterprise, it may consider the possibility of transferring these rights in exchange for stock. The corporation supplying the intangible rights may make such a transfer whether it emerges as the owner of 100 percent or some lesser percentage of the stock of the transferee foreign corporation. In most cases, intangible property rights transferred to a foreign corporation will have a value in excess of their tax cost or basis. On such a transfer, any gain realized will be recognized and taxed unless Internal Revenue Code Section 351 operates to prevent its recognition. Whether recognized gain will be treated as ordinary income or capital gain may turn on the nature…