Page 228 - TaxAdviser_2022

TAX CLINIC

timely Sec. 338(g) election, which treats (ignoring the treatment of the federal
the buyer’s stock acquisition as if it were tax liability as an assumed liability). Foreign Income & Taxpayers
an asset acquisition. Under Sec. 338(a), ■ Taxable income: $6 million gain less
the old target corporation is treated as $3 million net operating loss car- Considerations for
having sold all of its assets at fair market ryover = $3 million. multinationals with US
value at the close of the sale date, and ■ Tax before credits = $3 million × 21% and Maltese operations
the target is subsequently treated as a = $630,000. Malta has long been viewed as a favor-
new corporation that purchased all of ■ Maximum credit usage = $630,000 able jurisdiction in which to conduct
the old target’s assets as of the day fol- – ([$630,000 – $25,000] × 25%) = international business operations. The
lowing the acquisition date. $478,750. island nation located off the coast of
A downside to a Sec. 338(g) election ■ Tax after credits = $630,000 – Sicily is an EU member. In addition, the
is that the deemed asset sale will gener- $478,750 = $151,250. Maltese tax system offers a tax refund
ate taxable gain or loss for the old target ■ Without the application of Sec. 196, mechanism that can result in an effective
corporation. This is where Sec. 196 can the deemed sale results in federal tax corporate income tax rate of between 0%
be used as a tax savings technique. Since liability of $151,250 and unused tax and 10% for certain Maltese corpora-
the old target ceases to exist after the credits of $271,250 ($750,000 credits tions owned by nonresidents.
deemed sale, Sec. 196 arguably applies, carrying into the year less $478,750 Because of these and other features,
allowing corporations with general utilized during the year). such as the fact that Malta does not
business credit carryovers to minimize By applying Sec. 196(b) to “old” A impose withholding tax on dividends,
or perhaps completely eliminate the tax (a corporation that ceases to exist), the interest, or royalties under its domestic
liability generated upon the deemed sale original tax liability can be reduced by law and the island country’s extensive
of assets. 21% of the unused tax credits as follows: tax treaty network, many multinationals,
Let us apply this to a hypotheti- ■ New Sec. 196 deduction = $271,250 including those with U.S. operations,
cal transaction. ($750,000 credit carryover less may be tempted to incorporate a Mal-
$478,750 credits utilized to offset the tese entity into their group structure.
Example: The shareholders of corpo- tax on the deemed sale). Multinational businesses, however,
ration A desire to sell their stock for ■ Post–Sec. 196 taxable income = $6 should carefully assess the interaction
$10 million. Assume that A has no million gain less $271,250 Sec. 196 of Malta’s tax refund mechanism with
liabilities. A’s tax attributes include deduction less $3 million net operat- the ability to claim benefits under the
a federal net operating loss of $3 ing loss carryover = $2,728,750. United States–Malta tax treaty, as well as
million and work opportunity credit ■ Post–Sec. 196 tax before credits = the potential interaction with proposed
carryovers of $750,000 (neither of $2,728,750 × 21% = $573,038. U.S. anti-conduit regulations. This
which is subject to any limitation ■ Post–Sec. 196 tax after credits = discussion explores certain issues that
under Sec. 382 or 383). Buying $573,038 – $478,750 (fixed amount multinationals should consider when
corporation B desires to purchase A’s from original tax computation) = deciding whether to use Malta as part of
assets but instead purchases the A $94,288. their worldwide operations.
stock and makes a timely Sec. 338(g) ■ Sec. 196 tax savings = $151,250 old
election to accomplish this goal. As tax – $94,288 revised tax = $56,962 Malta imputation system
a result of this election, “old” A is ($271,250 unused credits × 21%). Under the Maltese Income Tax Act,
deemed to sell its assets to “new” A corporations that are incorporated and
in a taxable transaction. A’s historic Conclusion tax resident in Malta are generally sub-
tax basis in its assets is $4 million. General business credits are a valuable ject to a 35% corporate income tax on
Assume that A does not generate any tax attribute for C corporations and their worldwide income, but in certain
income, loss, or business credits in its individuals. Practitioners should famil- circumstances a substantial refund is
final year of operations. iarize themselves with Sec. 196 to obtain available. More specifically, a corpora-
maximum tax benefits for clients who tion’s distributable profits are allocated
“Old” A’s tax liability associated with would otherwise lose credits due to the to a number of “accounts,” depending
the deemed sale is computed as follows: credits’ expiring, the taxpayer’s dying, or on the source and nature of the profits.
■ Gain on sale: $10 million deemed the taxpayer’s ceasing to exist. Under the Maltese imputation system,
purchase price less $4 million tax From Lisa Haffer, CPA, J.D., provided certain conditions are fulfilled,
basis = $6 million taxable gain Akron, Ohio dividend distributions made from these

10 May 2022 The Tax Adviser