Joe Soltis, Claude Stansbury, and Robert Scarborough are partners at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Soltis, Mr. Stansbury, Mr. Scarborough, Sarah Solum, and Daniel Fox. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse M. Fried and Charles C.Y. Wang (discussed on the Forum here); and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse M. Fried (discussed on the Forum here).
On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (the “IRA”) into law. Although far from the sweeping tax reform that the Biden Administration had originally envisioned, one provision from the previously proposed “Build Back Better Act” that was included in the IRA is a new 1% non-deductible excise tax on stock repurchases by publicly traded U.S. corporations (the “Buyback Tax”).
Overview of the Buyback Tax
The Buyback Tax applies, with certain exceptions, to stock buybacks and other transactions effected after December 31, 2022 that are treated as redemptions for tax purposes. A corporation is generally treated as redeeming its stock if it acquires such stock from a shareholder in exchange for property (other than its own stock or rights to acquire its own stock), regardless of whether the stock is cancelled, retired, or held as treasury stock. Corporations subject to the Buyback Tax (“covered corporations”) include publicly traded U.S. corporations and publicly traded foreign corporations that have undergone certain “inversion” transactions since September 20, 2021. Repurchases by 50%-owned subsidiaries of a covered corporation are generally treated as having been made by the covered corporation itself. Foreign public companies, including foreign private issuers that are listed on U.S. exchanges, are generally not subject to the Buyback Tax, although a purchase by certain U.S. subsidiaries of a foreign public parent company’s stock may be subject to the Buyback Tax (with certain modification).
The Buyback Tax does not apply to stock repurchases (i) that are part of a tax-free reorganization in which the redeemed shareholder does not recognize gain or loss, (ii) where the redeemed stock (or stock of an equal value) is contributed to an employer-sponsored retirement plan, employee stock ownership plan, or a similar plan, (iii) effected by a real estate investment trust (REIT) or regulated investment company (RIC), or (iv) to the extent treated as dividends for tax purposes. A de minimis rule exempts covered corporations that repurchase less than $1 million of their stock during a given taxable year, and the U.S. Department of the Treasury (“Treasury”) is directed to issue regulations that exempt certain repurchases by securities dealers. READ MORE
