Cross-border mergers and acquisitions (M&A) introduce a complex layer of international tax considerations for both U.S. and non-U.S. companies. Navigating these issues is crucial for maximizing value and avoiding unintended tax liabilities. Key considerations vary significantly depending on whether the transaction is inbound (foreign buyer acquiring a U.S. target) or outbound (U.S. buyer acquiring a foreign target).
Key tax issues in inbound M&A
For foreign companies acquiring U.S. businesses, primary tax concerns focus on efficient structuring and post-acquisition operations.
- Entity choice and structure: Deciding between stock or asset acquisition, and whether to use a U.S. or foreign vehicle, impacts future tax treatment. Asset deals may allow a step-up in asset basis, providing future deductions.
- Repatriation planning: Efficiently moving profits out of the U.S. (via dividends, interest, management fees and royalties, interest) requires attention to U.S. withholding taxes and treaty benefits.
- Deductibility of acquisition debt: Structuring acquisition debt to ensure U.S. interest deductibility is crucial.
- FIRPTA: The Foreign Investment in Real Property Tax Act (FIRPTA) taxes foreign persons on dispositions of U.S. real property interests, which requires careful planning if the U.S. target holds significant U.S. real estate.
- Exit planning: Partnerships may be preferred for U.S. operations, but stock sales are generally tax-free for nonresidents, while partnership sales are taxable.
Key issues in outbound M&A
U.S. companies acquiring foreign businesses face a separate set of challenges, often centering on U.S. tax reform provisions and foreign tax credits.
- Foreign tax credits (FTCs):Planning is needed to ensure foreign taxes paid are creditable in the U.S., avoiding double taxation.
- Controlled foreign corporations: CFC earnings may be taxed in the U.S. under GILTI (active income) or Subpart F (passive/low-taxed income) rules. Planning is available and crucial to mitigating the negative impact of CFC rules.
Key issues for both inbound and outbound M&A
- Post-acquisition structuring: Integrating new operations with existing entities to attain tax efficiency in operations and on exit is key to achieving a low effective tax rate for the combined structure.
- FDII export incentive for U.S. corporations: FDII (Foreign-Derived Intangible Income) provides a reduced effective corporate tax rate of 13.125% (increasing to 14% in 2026) related to exports of products and services as well as from licensing intangibles, if structured properly.
- Transfer pricing: All intercompany transactions must follow arm’s length principles, an area of high scrutiny by tax authorities.
International tax issues in M&A are highly fact-specific and require comprehensive diligence and structuring before the deal closes. The interplay between U.S. domestic law and a patchwork of international tax treaties necessitates early engagement with tax specialists to avoid costly pitfalls and achieve an optimal post-acquisition tax position.