USA Law and Practice Contributed by: G. J. Ligelis Jr., Christopher K. Fargo, Alyssa K. Caples and Margaret T. Segall, Cravath, Swaine & Moore LLP
intercompany debt and redomiciling US companies to non-US jurisdictions to avoid incurring US tax on income from non-US operations. Developments in US tax law have significantly con - strained the availability and effectiveness of many of these strategies. Statutory developments include limi - tations on the deductibility of interest, a minimum tax rate on certain payments to affiliated non-US persons and current taxation of most income earned by US corporations through non-US subsidiaries. Statutory and regulatory changes have also severely limited the tax benefits of redomiciling US corpora - tions. Finally, the Internal Revenue Service (the “IRS”) has won significant victories in court attacking various transfer pricing arrangements intended to shift income offshore. 9.4 Tax on Sale or Other Dispositions of FDI Dispositions of shares of a US corporation by a non- US person are generally not subject to US tax, unless the corporation holds substantial amounts of US real estate and none of the several exceptions are availa - ble. Gains from the disposition by a non-US person of a partnership interest is subject to US tax to the extent the gain is attributable to the conduct of a US trade or business by the partnership or the partnership holds a substantial amount of US real estate. These taxes are typically enforced in the first instance through with - holding on payments by the acquirer. As discussed in 9.1 Taxation of Business Activities , because the USA imposes tax on operations con - ducted by non-US persons in the USA, it is typical for non-US investors to invest in pass-through US businesses through a “blocker” corporation that pays taxes and files US tax returns. The “blocker” corpora - tion is still subject to US tax on income it derives from the business, and it may also be subject to US tax or withholding tax on dividends paid to its non-US shareholders. As a consequence, investing through a “blocker” corporation does not generally reduce US taxes on ongoing operations. However, a “blocker” corporation may produce a US tax benefit upon exit because the disposition of the stock of the “blocker” corporation is generally exempt from US tax, whereas a disposition of the assets of the US business (or a
disposition of the interests in the partnership conduct - ing the business) would not be exempt. Furthermore, the non-US shareholders of the “blocker” corporation are generally not required to file US tax returns as a result of the investment or the disposition. 9.5 Anti-Evasion Regimes US tax law includes many provisions intended to pre - serve the US tax base. There are specific and com - plex rules on transfer pricing arrangements intended to ensure transactions between US and non-US affili - ates are undertaken on an arm’s-length basis, as well as rules limiting the ability of a US corporation to claim deductions on interest and other liabilities to non-US affiliates prior to payment. In addition to the limitation on benefits provisions found in many US tax treaties, US tax law contains several provisions limiting the availability of treaty benefits and deductions for payments made to hybrid entities or with respect to hybrid instruments. These restrictions generally apply where applicable non-US law treats the payments differently from US law. US tax law also includes several judicially created doctrines intended to prevent taxpayers from applying statutory or regulatory provisions to obtain unintended benefits. These include the economic substance doc - trine and substance-over-form principles, which may be applied to disregard the form of a transaction in determining its appropriate tax treatment. Since 2023, US tax law has applied a corporate alter - native minimum tax (“CAMT”) intended to close the gap between US taxable income and financial profits reported to shareholders. Applicable corporations in a group with over USD1 billion of average annual adjust - ed financial statement income are subject to a mini - mum tax of 15% on that income in each taxable year. The IRS has issued substantial guidance and pro - posed regulations addressing CAMT. These proposals have included expanding safe harbours and providing administrative and estimated-tax relief. Special rules continue to apply for foreign-parented groups and certain entity types, and the detailed mechanics for determining CAMT liability and group status remain subject to ongoing guidance and refinement.
704 CHAMBERS.COM
Powered by FlippingBook