On August 19, the IRS announced guidance providing relief for certain non-U.S. corporations redomiciling into the United States. Notice 2025-45 (the "Notice") introduces an exception to the general rule requiring gain recognition on certain actual or deemed transfers of interests in U.S. real property held by a foreign corporation redomiciling into the United States through a "covered inbound F reorganization."
An "F reorganization" is defined as a "mere change in identity, form, or place of organization of one corporation, however effected." These transactions are generally tax-free to both the corporation undergoing the F reorganization and its shareholders. Under the Foreign Investment in Real Property Tax Act ("FIRPTA"), however, when a non-U.S. corporation becomes a U.S. corporation in an F reorganization, it must generally recognize built-in gain on any interests it holds in U.S. real property (including U.S. subsidiaries whose value is mostly attributable to interests in U.S. real property). Although Treasury regulations and IRS guidance issued in 1989 and 2006 carved out a limited exception to this general rule, the IRS has determined that the prior exception can be expensive and impractical for publicly traded corporations, potentially deterring otherwise unobjectionable inbound transactions in which foreign corporations become U.S. corporations for non-tax business reasons.
The new exception announced by the IRS for "covered inbound F reorganizations" applies only to publicly traded foreign corporations that become U.S. corporations in an F reorganization. To qualify as "publicly traded," the corporation's principal class of stock must be regularly traded on an "established securities market" for at least the three years immediately preceding and the one year immediately following the F reorganization. In addition, the newly announced exception will not apply if, following and pursuant to a plan with the F reorganization, the corporation distributes property (other than money or property valued at less than a specified de minimis amount) to any of its shareholders. A plan will be deemed to exist if any such distributions occur within a year of the date the F reorganization is completed.
Taxpayers may rely on the new exception in the Notice for inbound F reorganizations occurring after August 19, 2025, and the exception will be incorporated into future FIRPTA regulations.
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