Corporations sometimes decide to change the place in which they are incorporated for various reasons.
Moves WITHIN the United States.
A company's decision to change incorporation from one state in the U.S. to another generally has no impact on your cost basis. (Caveat: state and local income taxes such as enterprise zone credits may be impacted.)
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Moves OUT of the United States.
The glitch comes when the corporation whose stock you own decides to change incorporation from the USA to a foreign country (usually for more favorable tax treatment.) Uncle Sam says, "We can't stop you, but we can tax you when you leave."
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This is called a change in domicile or a redomestication (change in location combined with a change in the articles of incorporation.) The technical term "corporate inversion" generally refers to certain types of corporate domicile changes through reverse mergers into foreign corporations. Under current rules, the foreign corporation's shareholders must own 20% or more of the combined corporation for the corporate inversion to be permitted. Sometimes the company even maintains their former U.S. location, but it is no longer the official headquarters.
Examples of this include the move of Eaton to Ireland, Transocean Offshore Inc from Delaware to the Cayman Islands, Noble Drilling from Delaware to the Cayman Islands, Ingersoll-Rand to Bermuda, Aon to the UK, and the Sara Lee Corp spinoff of DE Master Blenders.
The Perrigo Co change of domicile can be found in our cash to boot calculator.
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| Change in Domicile Calculator |
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You can use our "Change of Domicile" calculator to compute the taxable gain you should recognize for the redomestication of the U.S. stock you hold when it moves to a foreign country. The market values in our database are estimated based on the legal date of the move. You should use the actual values reported to you by the Company.
The general rule under IRC Section 367 is that the stockholder must report capital gain income for all the unrealized gains (but not losses) up to the point of departure. The fair market value of the stock on the day the change in domicile is effective becomes the sales proceeds per share. You compare that price to your previous cost basis per share to determine the gain to report. Your holding period for the redomesticated corporation generally includes the time you held the US-based stock.
Unrealized losses are not allowed to be recognized--you carry over your previous cost basis to the new shares in this case and also retain your original holding period.
However, some corporate inversions are fully taxable, such as the Horizon Pharma Inc reverse merger into Vidara. This means you must recognize any gain OR loss. You need to consult the definitive proxy statement to ascertain the tax status of each particular change of domicile.
Note that changes in domicile between foreign countries are not taxed, nor are changes of domicile for corporations moving into the US (although the country they are leaving may impose a tax of their own.) Also, changes of domicile between states in the U.S. are not subject to taxation.
For special situations such as the spinoff of DE Master Blenders 1753 NV by Sara Lee Corp, first the spinoff calculator should be used to allocate cost basis between Sara Lee (renamed Hillshire Brands Co) and DE Master Blenders. Then the change in domicile calculator should be used to compute the taxable gain (but not loss) for the move to the Netherlands, using the cost basis determined in the first step.
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Moves INTO the United States
There are also potential cost basis and tax ramifications if a corporation moves INTO the United States from a foreign country. If (1) the fair market value of your holdings are less than $50,000, (2) you own less than 10% of the voting interest, and (3) it is not a PFIC, there is generally no gain or loss to recognize.
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"Be fearful when
others are greedy and
greedy when others are
fearful."
--Warren Buffett
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If you do own more than 10% of the voting stock, you will generally be required to report dividend income equal to "all earnings and profits" and increase your cost basis by the same amount.
If your holdings exceed $50,000 in fair market value, you will be required to recognize gain (but not loss) for the excess of the fair market value over your adjusted cost basis at the effective time of the move (unless you elect to report dividend income for "all earnings and profits.") The election to report "all earnings and profits" must be made on a tax return filed on time for the year of the redomestication and must include at least six statements or items of information:
1. The election is being made under Treasury Regulation Section 1.367(b)-3(c)(3).
2. The shareholder has given notice to the Corporation that the election is being made.
3. The amount of "all earnings and profits" that is being reported as a dividend.
4. A copy of the notice from the Corporation reporting the "all earnings and profits" amount.
5. A complete description of the exchange.
6. Declaration that it is a section 367(b) exchange.
If the corporation is a PFIC, you must consult your professional tax advisor for guidance.
An example of this type of redomestication is the move of Salix Pharmaceuticals Ltd from the British Virgin Islands to Delaware on 12/31/2001.
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