Applied Materials and Tokyo Electron plan to complete their corporate merger in the second half of 2014. The new company will be called Eteris and will be incorporated in the Netherlands. This is another example of American corporations merging with foreign corporations and reincorporating overseas. The result for the corporation is lower taxes since many foreign countries have lower corporate taxes than the United States. These transactions have become controversial since there is a perception that many of these corporations are using technicalities to avoid US corporate taxes, even though they are still often primarily based in the US.
Unfortunately for shareholders, there is a huge impact on their stockholdings in the US company that undergoes such a tax inversion. In the course of reincorporating overseas, new shares must be issued. The conversion of existing shares to the new (foreign) shares is a taxable event. The original US shares are considered sold when they are converted to the new shares. Hence, any capital gains (or losses) are realized on conversion. The shareholder’s basis in the new shares is the price at conversion. Hence, in the case of Eteris, Applied Materials shareholders will realize a taxable event when the merger is completed. While the tax inversion may benefit corporate earnings, it could lead to large, unplanned capital gains for shareholders.
While the unplanned capital gain is very unfortunate, there is a small silver lining. Since the typical tax concerns of selling shares has been removed, it does give Applied employees who have a large percentage of their savings in AMAT shares a chance to diversify their holdings. Feel free to contact us with any questions at info@L2Wealth.com.
