Cross-border M&A transactions — where the buyer and seller are located in different countries, or where the target company has operations in multiple jurisdictions — involve a layer of legal and tax complexity that goes well beyond the considerations in a domestic U.S. transaction. Exchange control regulations, foreign ownership restrictions, tax treaty implications, withholding taxes, anti-inversion rules, and the requirements of local corporate law must all be analyzed and addressed in the deal structure and documentation. Business owners who are selling to a foreign buyer, or buying a business with international operations, should understand the key frameworks that govern these transactions.

Inbound vs. Outbound Transactions

A U.S. inbound transaction is one in which a foreign buyer acquires a U.S. business. An outbound transaction is one in which a U.S. buyer acquires a foreign business. The legal and tax issues differ significantly depending on the direction of the transaction.

In an inbound transaction, the U.S. seller’s tax consequences are determined primarily by U.S. tax law: the character and amount of gain from the sale of the target company’s stock or assets, the applicable U.S. income tax rates, and any available planning tools such as the QSBS exclusion or installment sale election discussed elsewhere on this website. The foreign buyer may have U.S. withholding tax obligations if it is acquiring U.S. real property (under FIRPTA — the Foreign Investment in Real Property Tax Act), and CFIUS national security review may be required as discussed in the CFIUS article on this website.

In an outbound transaction, the U.S. buyer must navigate the tax rules applicable to acquisitions of foreign businesses, including the treatment of the target’s foreign earnings and profits (which may have been subject to reduced or no current U.S. tax under the check-the-box rules or subpart F before the acquisition), the impact of the GILTI and BEAT provisions enacted in the Tax Cuts and Jobs Act of 2017, and the structuring of the post-closing holding structure to minimize overall effective tax rates on the combined business.

Withholding Taxes in Cross-Border Deals

Cross-border M&A transactions frequently involve withholding taxes imposed on payments made between entities or individuals in different countries. Dividend withholding taxes apply to distributions of earnings from a subsidiary to its foreign parent. Royalty withholding taxes apply to royalty payments made across borders for the use of intellectual property. Interest withholding taxes may apply to interest payments on intercompany loans. These withholding taxes are typically subject to reduction or elimination under applicable tax treaties, but the availability of treaty benefits depends on the residence of the recipient and the satisfaction of treaty limitation on benefits rules.

In an asset deal involving the purchase of business assets located in a foreign country, the applicable withholding tax treatment depends on the characterization of the assets being sold and the applicable domestic law and tax treaty of the country where the assets are located. In some jurisdictions, the buyer is required to withhold a portion of the purchase price and remit it to the local tax authority as a deposit against any capital gains tax that the seller may owe, even if the seller’s residency or treaty position should reduce or eliminate the tax.

Anti-Inversion Rules Under Section 7874

The U.S. anti-inversion rules under Section 7874 of the Internal Revenue Code are designed to prevent U.S. companies from reducing their U.S. tax obligations by reincorporating in a foreign jurisdiction through a cross-border merger or acquisition. Under these rules, if a U.S. corporation merges with or is acquired by a foreign corporation and the former U.S. shareholders own 80 percent or more of the combined entity, the foreign acquiring corporation is treated as a U.S. corporation for all purposes of the Internal Revenue Code — the inversion is completely nullified for tax purposes. If the former U.S. shareholders own between 60 and 80 percent, the new foreign corporation’s ability to strip U.S. earnings through interest deductions and other techniques is significantly limited.

The anti-inversion rules affect the structuring of transactions in which a U.S. company is acquired by a foreign company in exchange for stock of the foreign acquirer. Deal lawyers and tax advisors in these transactions must carefully analyze whether the transaction creates an inversion risk and, if so, whether the deal structure can be modified to avoid it. Strategies for avoiding the anti-inversion rules include increasing the dilution of the former U.S. shareholders’ ownership in the combined entity, using cash rather than stock for a larger portion of the consideration, and ensuring that the foreign acquirer has sufficient business substance in its home country.

Foreign Tax Credit Planning

U.S. taxpayers who earn income in foreign jurisdictions and pay foreign income taxes on that income may be entitled to a foreign tax credit against their U.S. income tax liability, preventing double taxation. In cross-border M&A, foreign tax credit planning is relevant both to the acquisition structure itself and to the ongoing operations of the combined business. A U.S. buyer that acquires a foreign subsidiary and expects to receive dividends from it should plan the holding structure to maximize the availability of foreign tax credits on those dividends. The high-tax exception, the basket rules, and the foreign branch income rules all affect the availability and optimization of foreign tax credits.

Local Law Due Diligence

In any cross-border transaction where the target has operations in foreign jurisdictions, local law due diligence is an essential component of the overall diligence program. Local law due diligence examines the target’s compliance with the corporate, employment, real property, intellectual property, regulatory, and tax requirements applicable in each jurisdiction where it operates. The scope and importance of local law diligence varies by jurisdiction: highly regulated industries or high-risk countries require more extensive local diligence than standard commercial operations in familiar jurisdictions.

Local law diligence issues that commonly arise in cross-border transactions include: restrictions on foreign ownership of businesses in specific industries (telecommunications, media, financial services, and defense are frequently restricted), labor and employment laws that impose significantly different termination, severance, and works council notification requirements than U.S. law, data protection laws (including GDPR in the EU context) that affect how personal data can be transferred in the transaction, and local competition clearance requirements that must be obtained in addition to or in lieu of U.S. HSR approval.

Multi-Jurisdictional Regulatory Approvals

Large cross-border transactions typically require competition clearance in multiple jurisdictions simultaneously. In addition to U.S. HSR review, transactions above applicable thresholds may require filing and clearance in the European Union (before the European Commission or national competition authorities), the United Kingdom (before the Competition and Markets Authority), China, Germany, Austria, and many other jurisdictions that have merger control regimes. Managing these parallel review processes — coordinating filing timing, responding to information requests, and negotiating remedies if required by different authorities in different markets — requires experienced antitrust counsel in each relevant jurisdiction and sophisticated project management.

The challenge of multi-jurisdictional regulatory clearance is not just logistical; different competition authorities may take different views of the same transaction and may impose different remedies. A transaction that is cleared unconditionally in the United States might require divestitures in the European Union or behavioral conditions in China. Buyers and sellers must agree in advance on how the cost and disruption of multi-jurisdictional clearance will be allocated, and the purchase agreement should address outside dates and termination rights that account for the longest anticipated review timeline across all required jurisdictions.