The application of §1248 and §338(g) in the context of the purchase or sale of a controlled foreign corporation (CFC) has long been one of the most complex areas of the tax code. The recently enacted tax reform act — herein, the ‘‘2017 tax act’’ or the ‘‘Act’’ — by repealing deferral and replacing it with a combination of worldwide taxation of global intangible low-taxed income (GILTI) and a participation exemption, overturned the settled principles that applied to the purchase and sale of CFC stock. This article briefly explores the new rules on purchases and sales of CFC stock in light of the new rules and considerations applicable to tax reform. From a U.S. C corporation’s perspective as a seller, with the repeal of deferral, the decision of whether to sell stock or assets of a CFC will depend on an analysis of the particular fact pattern and numbers involved. Unique and potentially drastic consequences also apply in the case of a CFC that is owned by a U.S. partnership or passthrough entity, such as a private equity fund.

BACKGROUND ON THE RELEVANT PROVISIONS –

GILTI Under the Act -

Perhaps the most sweeping international tax change in the 2017 tax act was the introduction of GILTI as a new category of income of CFCs that is taxed currently to its United States shareholders on a ‘‘deemed dividend’’ or phantom income basis.

Originally published in Tax Management International Journal - September 14, 2018.