Non Cash Equity Injections in Cross Border Joint Ventures
Cross-border non-cash equity injections require independent asset appraisals, registry paid-up capital verification, and transfer pricing protection clauses.
Section 351
Meaning
Federal tax code provisions in the United States permit the transfer of property to a controlled corporation without immediate tax consequences. This section 351 exchange allows entrepreneurs and investors to move patents and equipment into a new company in exchange for stock. The goal is to facilitate business formation by delaying the recognition of gains.
It applies when the group of people transferring property owns at least eighty percent of the voting power.
Control Requirement
Ownership thresholds must be met immediately after the transaction for the tax deferral to hold. Under section 351, the transferors must act as a group to reach the necessary percentage of shares. If the group fails this test, the transfer is treated as a taxable sale at market value.
Boot Limitation
Cash or other non-stock property received during the deal remains taxable. While the stock portion of a section 351 transaction is deferred, any extra cash is recorded as a gain. This prevents people from pulling untaxed money out of a venture during the startup phase.
Basis Continuity
Tax history of the original assets moves into the new shares and the company books. The corporate basis in the equipment under section 351 stays the same as it was in the hands of the founder. This ensures the tax is paid eventually when the company sells the asset or the founder sells the stock.