Treasury and the IRS released on March 20 final regulations relating to the limitation on foreign tax credits (FTCs) for foreign taxes paid or accrued in connection with covered asset acquisitions (CAAs) under Section 901(m). Section 901(m) disallows a portion of the FTC attributable to a basis difference in assets acquired in a CAA. The final regulations are generally consistent with temporary and proposed regulations issued on December 6, 2016, with targeted revisions to address some comments received from taxpayers.
The disallowance of FTCs under Section 901(m) can have a material effect on the economics of cross-border M&A, as well as related-party transactions. . The final regulations are complex and can require significant analysis to apply even to straightforward transactions. Furthermore, the newly adopted aggregate basis difference carryover and successor rules may limit taxpayers’ ability to mitigate the impact of Section 901(m). Now that the regulations are effective for all taxpayers, businesses should consider the impact of Section 901(m) on all cross-border transactions.