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What Is a Gain Recognition Agreement?
A gain recognition agreement (GRA) occurs when a U.S. securities holder (the US transferor) makes a transfer of a stock or security and agrees to recognize a gain, provided the transferee, a foreign corporation, disposes of the transferred stock during the term of the agreement and agrees to pay the interest on any owed taxes if a triggering event occurs.
A gain recognition agreement is a legal document that outlines who pays taxes on a stock gain when it’s a foreign transaction outside of American soil. Rather than the person transferring paying taxes, the person receiving it pays taxes, even if it’s a foreign entity.
A gain recognition agreement aims to make sure someone pays income taxes on a capital gain through the sale or profit of property, such as during a stock transfer agreement. The IRS instituted this regulation in 2014.
Who Must File a Gain Recognition Agreement?
The person or entity doing the transferring must file a gain recognition agreement according to Section 367 of the U.S. Treasury regulations. In addition, the foreign transferee must fill out IRS Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
The idea is to make sure every form of earned income in the United States is appropriately taxed.
What’s Included in a Gain Recognition Agreement?
Gain recognition agreements must include several legal elements and delineate who pays taxes. A GRA must consist of:
Information about the U.S. transferor.
Name of the U.S. transferor and the identifying number. The identifying number of an individual is their social security number (SSN). The identifying number of all others is their employer identification number (EIN). This is also the entity that must file the gain recognition agreement with the IRS.
List of any controlling shareholders if the shares remain in existence after the transfer. You must also include any identifying numbers here, too.
Noting if the U.S. transferor belongs to a parent corporation transferring the stock or security and the EIN of that entity.
The U.S. transferor must answer a series of questions to identify certain circumstances under the terms of the gain recognition agreement, including:
- Is the transferee a specified 10%-owned foreign corporation that is not a controlled foreign corporation? This identifies any potentially close relationships with foreign investors or conflicts of interest.
- Did the transferor remain in existence after the transfer? For example, did the U.S. transferor sell the stock or security as part of a bankruptcy filing?
- If the transferor was a member of an affiliated group filing a consolidated return, was it the parent corporation? Again, to identify where the stock transfer came from.
- For a partnership, did the partner pick up its pro-rata share of gain on the transfer of partnership assets? This identifies who stands to gain profits from the gain of transfer if more than one person owned the asset.
- Is the partner disposing of its entire interest in the partnership? If so, not all of the sale or gain of the stock may be taxable.
- Is the partner disposing of an interest in a limited partnership regularly traded on an established securities market? The IRS is trying to ascertain the tax liability of the stock.
Image via Pexels by Anna Nekrashevich
Information about the foreign transferee.
Identifying information, such as:
Name, address, identifying number or other identifying information, country code, and foreign law characterization/jurisdiction.
Answering the question: Is the transferee foreign corporation a controlled foreign corporation?
Information about the securities, stock, or cash value transferred.
Every security must have the same basic information in the gain recognition agreement:
- Date of transfer
- Description of property
- Fair market value on the date of transfer (in U.S. dollars)
- Cost or other basis
- Gain recognized on the transfer
Types of property for this form are:
- Securities including bonds, treasury notes, precious metals, and real estate
- Other property not listed
- Property with built-in loss, like liquidated property, sold for far less than its original value
- Intangible property, such as goodwill, workforce in place, or services of an individual
Questions answered here revolve around:
Is this a Section 367 gain recognition agreement? It’s letting the IRS know who has the tax liability in this situation.
Were any foreign branch assets (including a branch that is a foreign disregarded entity) transferred to a foreign corporation? The IRS is trying to ascertain who pays taxes based on the stock purchase agreement or asset transfer agreement.
Was the transferor a domestic corporation that substantially transferred all of the foreign branch's assets (including a branch that is a foreign disregarded entity) to a specified 10%-owned foreign corporation? The tax agency is trying to see if there is a potential conflict of interest.
Immediately after the transfer, was the domestic corporation a U.S. shareholder with respect to the transferee foreign corporation? In other words, does the U.S. transferor own a portion of the transferee?
Other questions revolve around what happened to the entities before and after the transfer.
How Long Does A Gain Recognition Agreement Last?
A gain recognition agreement will last 60 months following the end of the taxable year in which the transfer is made.
What Are Triggering Events for Gain Recognition Agreements?
A triggering event is anything that changes the disposition of the assets.
For example, a US transferor's failure to comply in any material respect within the confines of a gain recognition agreement or any other necessary reporting elements.
What Are Gain Recognition Agreement Filing Requirements?
A triggering event must occur first.
A U.S. transferor has to:
- Report the gain to the IRS via an amended return for the year of transfer.
- Adjust how the gain was recognized (i.e., the value in foreign currency).
- Pay any penalties or interest on the additional assessed taxes.
Here is an article on property transfer agreements.
What Are Gain Recognition Agreement Annual Certification Requirements?
A GRA must be certified for each of the five full taxable years following the taxable year of the initial transfer. For example, if you file a GRA in 2021, the fifth year is 2025.
How Can a Corporate Lawyer Help With Gain of Recognition Agreements?
A corporate lawyer has the experience and knowledge to navigate gain of recognition agreements and other issues.
You can find an excellent corporate lawyer by filling out a simple questionnaire about your needs, and Contracts Counsel will show you people through our platform who meet your requirements.
Why have a corporate lawyer on your side? Because you can file taxes correctly, navigate complex IRS issues with foreign corporations, and make sure your assets are fully protected.
Post a project in ContractsCounsel’s marketplace to get flat fee bids from lawyers to review for your legal projects. All lawyers in our network are vetted by our team and peer-reviewed by our customers for you to review before hiring.
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