Cross-Border Corporate Reorganizations and the Use of Gain-Recognition Agreements to Avoid Significant Adverse Tax Consequences
By Anthony Diosdi Whenever a U.S. person decides to establish a foreign corporation (or foreign business entity), it will be necessary to capitalize the foreign corporation with a transfer of cash and other property in exchange for its stock. When appreciated property, such as equipment or certain property rights, is transferred to a foreign corporation, gain will often be realized by a U.S. person. The basic problem is the need to protect the right of the country of residence of the transferor corporation or shareholder to tax gains realized by its taxpayer in the transaction. The concern of that country is that, if not taxed immediately, the gain will escape its tax net permanently. Since 1932, Internal Revenue Code Section 367 has provided the mechanism for protecting the U.S. taxing…