1Initial Structure100%ZShareholdersCorp Y(Country Q)(Acquiror)Corp Z(Country Q)(Target)2Foreign Statutory MergerCorp YStockSurrenderCorp ZStockAll Corp ZAssetsand LiabilitiesZShareholdersCorp Y(Country Q)(Acquiror)Corp Z(Country Q)(Target)3Ending PointZShareholdersCorp Z(Country Q)(Target)Corp ZAssets and LiabilitiesLegendOwnership / structural holdingTransfer of stock / cash / assets

Foreign Statutory Merger Explained

The diagram walks through a three-step combination of two Country Q corporations. In the Initial Structure, the Z shareholders own 100% of Corp Z (the target and transferor combining entity), while Corp Y (the acquiror and transferee combining entity) stands separately. Both Corp Y and Corp Z are organized under the laws of Country Q and are classified as corporations for U.S. Federal income tax purposes.

In the Foreign Statutory Merger, Y and Z combine pursuant to the statutes of Country Q. Simultaneously at the effective time: all of Corp Z’s assets and liabilities become the assets and liabilities of Corp Y, Corp Y issues its stock to the Z shareholders, and the Z shareholders surrender their Corp Z stock. Corp Z’s separate legal existence ceases for all purposes.

At the Ending Point, the former Z shareholders hold the surviving Country Q entity, which now holds all of the former Corp Z assets and liabilities.

Because the transaction is effected pursuant to the statutes of Country Q, and at the effective time all of the assets and liabilities of Z (the combining entity of the transferor unit) become the assets and liabilities of Y (the combining entity and sole member of the transferee unit) while Z ceases its separate legal existence, the transaction satisfies paragraph (b)(1)(ii) and qualifies as a statutory merger or consolidation under § 368(a)(1)(A).

Key Takeaways

Foreign law can effect an A reorganization

A merger or consolidation carried out under the statutes of a foreign jurisdiction — here, Country Q — can qualify as a statutory merger under § 368(a)(1)(A), provided the requirements of Treas. Reg. § 1.368-2(b)(1)(ii) are met.

Combining-unit analysis

The transferor combining unit is Corp Z; the transferee combining unit is Corp Y, its sole member and combining entity. Z’s assets and liabilities must become those of the transferee unit at the effective time.

Simultaneous events at the effective time

All of Z’s assets and liabilities pass to Y and Z’s separate legal existence ends for all purposes simultaneously, satisfying the operative requirements of paragraph (b)(1)(ii).

Continuity through the merger

The Z shareholders surrender their Corp Z stock and receive Corp Y stock, so proprietary interest in the target continues through stock of the acquiring corporation.

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