PRACTICE AREAS
International Tax Due Diligence Checklist
Key international tax issues to investigate in a cross-border M&A transaction
International tax due diligence is a distinct discipline from general tax due diligence. The issues — FIRPTA, CFC and NCTI exposure, entity classification, transfer pricing, international information return compliance — require specialized analysis that goes beyond a review of domestic income tax returns and audit history. This checklist covers the key international tax areas to investigate when a transaction involves a foreign buyer, foreign seller, foreign target, or U.S. business with cross-border operations.
This checklist is organized around the most common international tax issues that arise in cross-border transactions. It is not exhaustive — every transaction presents its own facts — but it identifies the issues that are most frequently material and most commonly missed.
Who should use this?
This checklist is for buyers, sellers, and deal teams conducting tax due diligence on a cross-border M&A transaction involving a foreign buyer, foreign seller, foreign target, or U.S. business with cross-border operations. It focuses specifically on the international tax issues — not general domestic tax due diligence — and is designed to be used alongside a general M&A tax due diligence review.
Section 1
Threshold Questions — Scoping the International Tax Review
Before diving into specific issues, establish the international tax profile of the transaction. These threshold questions determine which areas of the checklist apply and how much depth is warranted.
- Is the target a U.S. entity, a foreign entity, or a mixed structure with both U.S. and foreign components?
- Is the buyer a U.S. person, a foreign person, or a foreign-owned U.S. entity?
- Is the seller a U.S. person or a foreign person? If foreign, FIRPTA analysis is required.
- Does the target own U.S. real property directly or through a subsidiary? If so, USRPHC analysis is required.
- Does the target have any controlled foreign corporations (CFCs) or foreign subsidiaries?
- Does the target have any passive foreign investment company (PFIC) holdings?
- Does the target have related-party transactions with foreign affiliates? If so, transfer pricing review is required.
- Is the transaction structured as a stock acquisition or asset acquisition — and does the international tax analysis differ depending on the structure?
- What jurisdictions are involved — and is local international tax counsel required in any of them?
Section 2
FIRPTA Analysis
FIRPTA withholding applies when a foreign person disposes of a U.S. real property interest — including stock in a U.S. real property holding corporation (USRPHC). The buyer bears the withholding obligation and liability if it fails to withhold.
- Determine whether the seller is a foreign person for FIRPTA purposes.
If the seller is a foreign corporation, foreign individual, or foreign trust, FIRPTA analysis is required. If the seller certifies U.S. person status on a Form W-9 or FIRPTA certificate, verify the certification — a false certification does not relieve the buyer of liability.
- Determine whether the target qualifies as a U.S. real property holding corporation (USRPHC) — a U.S. corporation whose U.S. real property interests equal or exceed 50% of the total fair market value of its real property interests plus business assets.
The USRPHC determination requires a fair market value analysis of all assets. U.S. real property interests include direct ownership of U.S. real estate and interests in other USRPHCs. The determination must be made as of the date of disposition.
- If FIRPTA applies, determine the applicable withholding rate — generally 15% of the gross purchase price.
- Analyze whether any FIRPTA exemptions apply — including the publicly traded corporation exception, the interest in a non-USRPHC, or a treaty-based exemption.
- Evaluate whether a FIRPTA withholding certificate application (Form 8288-B) should be filed to reduce withholding based on actual tax liability rather than gross purchase price.
A withholding certificate application must be filed with the IRS before closing. If pending at closing, the full withholding amount must be placed in escrow. Plan the timeline accordingly — allow at least 90 days for IRS processing.
- Confirm that the purchase agreement addresses FIRPTA withholding — including who bears the economic cost of withholding, the seller’s obligation to cooperate with certificate applications, and the buyer’s withholding agent obligations.
Section 3
CFC, NCTI & PFIC Analysis
A U.S. buyer acquiring a target with foreign subsidiaries inherits the target’s CFC structure and any historical compliance issues. The due diligence must assess both the current exposure and the filing history.
- Identify all foreign subsidiaries and affiliates in the target’s structure — and determine whether any are controlled foreign corporations (CFCs) with U.S. shareholders owning more than 50% of vote or value.
- Review Forms 5471 filed for each CFC for each year in the applicable look-back period — confirm that all required filers filed, all required schedules were completed, and Subpart F income and NCTI were properly reported.
Penalties for failure to file Form 5471 begin at $10,000 per form per year. Missing or deficient Forms 5471 are a common due diligence finding in acquisitions of businesses with foreign operations and should be quantified as a pre-closing liability.
- Assess Subpart F income exposure — identify whether the target’s CFCs have Subpart F income that should have been included in the target’s U.S. gross income and determine whether those inclusions were properly reported.
- Model Net CFC Tested Income (NCTI) exposure — review the target’s NCTI inclusions and assess whether the NCTI regime has been properly applied, including any applicable deductions.
- Identify any passive foreign investment company (PFIC) holdings in the target’s structure — including foreign mutual funds, ETFs, and other passive foreign investment vehicles.
- Confirm that Form 8621 has been filed for each PFIC holding and that QEF or mark-to-market elections have been made where applicable — missing PFIC elections can create material retroactive tax exposure.
- Review the basis of CFC stock — Subpart F and NCTI inclusions increase the basis of CFC stock; failure to properly track basis can affect the gain calculation on a subsequent sale of the CFC.
Section 4
Foreign Entity Classification Pre-Expatriation Planning Strategies
The U.S. tax classification of foreign entities in the target’s structure must be verified — misclassification can affect which forms were required, which tax regimes apply, and what the post-closing structure looks like.
| Step | Action | What to know |
|---|---|---|
| Classify | For each foreign entity in the target’s structure, confirm its U.S. tax classification — corporation, partnership, or disregarded entity — under the check-the-box regulations. | Some foreign entities are per se corporations under the regulations and cannot elect a different classification. Others are eligible entities that may have made, or should have made, check-the-box elections. The current classification must be confirmed before modeling post-closing structure. |
| Elections | Review any check-the-box elections that have been made. | Confirm that Forms 8832 were properly filed and that the effective dates are consistent with the target’s filing history. |
| Hybrids | Identify any hybrid entities — entities treated differently for U.S. and foreign tax purposes. | Assess whether their hybrid status creates any U.S. tax issues. |
| Forms | Confirm that the appropriate information return forms correspond to the current entity classification. | Form 5471 for foreign corporations, Form 8865 for foreign partnerships, Form 8858 for foreign disregarded entities. |
Section 5
Transfer Pricing Review
Related-party transactions between the target and its foreign affiliates must be conducted at arm’s length. Transfer pricing adjustments by the IRS or foreign tax authorities can result in material tax assessments, penalties, and double taxation.
- Identify all intercompany transactions between the target and its foreign affiliates — including services, product sales, royalties, loans, and cost-sharing arrangements.
- Review the target’s transfer pricing documentation — confirm that contemporaneous documentation exists for material intercompany transactions and that the arm’s length standard has been applied.
The U.S. transfer pricing rules require contemporaneous documentation for controlled transactions. Failure to maintain adequate documentation can result in penalties in addition to the primary transfer pricing adjustment — penalties of 20% to 40% of the underpayment depending on the magnitude of the adjustment.
- Review the pricing methodology used for each major intercompany transaction type — and assess whether the chosen method and application appear defensible.
- Review any advance pricing agreements (APAs) or competent authority agreements in place — these may affect post-closing intercompany pricing obligations.
- Assess whether any foreign tax authority has raised transfer pricing issues in audits of the target or its foreign affiliates — prior adjustments are a significant risk indicator.
- Model the post-closing transfer pricing position — the acquisition may change the relationship between entities in ways that require revision of existing intercompany arrangements.
Section 6
International Information Return Compliance History
The target’s history of filing international information returns — beyond Forms 5471 — must be reviewed. Missing or deficient international information returns can constitute pre-closing liabilities or affect representations and warranties.
- Review FBAR (FinCEN Form 114) filing history for any U.S. persons in the target group with foreign financial accounts exceeding $10,000 in aggregate.
- Review Form 8938 (FATCA) filing history for specified foreign financial assets held by U.S. persons in the target group.
- Review Form 8865 filing history for any U.S. persons with interests in foreign partnerships in the target’s structure.
- Review Form 8858 filing history for any foreign disregarded entities in the target’s structure.
- Review Form 3520 and 3520-A filing history for any U.S. persons with foreign trust connections in the target’s structure.
- Quantify the penalty exposure from any identified filing gaps — international information return penalties can be significant and should be disclosed or indemnified in the purchase agreement.
Section 7
Foreign Tax Returns & Foreign Tax Positions
The target’s foreign tax return filing history and foreign tax positions affect the availability of foreign tax credits and the risk of foreign tax authority adjustments.
- Obtain and review foreign tax returns for the target and its foreign subsidiaries for the applicable look-back period.
- Identify open foreign tax years and any pending foreign tax audits or disputes — foreign tax authority adjustments can affect both the pre-closing and post-closing tax position.
- Review the target’s foreign tax credit (FTC) position — identify FTC carryforwards and assess whether they will be usable post-closing given the FTC limitation rules.
- Assess whether any foreign tax positions taken by the target are consistent with the U.S. check-the-box classification of the relevant entities — inconsistent positions can create exposure in both jurisdictions.
- Confirm that withholding taxes paid to foreign jurisdictions have been properly documented and are creditable as FTCs — gross receipts taxes and other non-income levies may not qualify.
Section 8
Purchase Agreement — International Tax Coverage
International tax exposures identified in due diligence must be properly addressed in the purchase agreement. Generic domestic tax representations and indemnities often do not cover the full scope of international tax risk.
- Confirm that the tax representations in the purchase agreement specifically cover international information return filings — Forms 5471, 8865, 8858, 8621, 3520, and FBAR.
- Confirm that the tax indemnity covers international tax liabilities — including foreign tax authority adjustments, transfer pricing assessments, FIRPTA withholding obligations, and information return penalties.
- Confirm that the survival period for international tax representations is adequate — the IRS statute of limitations for international information return penalties does not begin to run until the form is filed, so the standard three-year survival may be insufficient.
- If specific international tax exposures were identified in due diligence, confirm that they are addressed through price adjustment, escrow, specific indemnity, or disclosure and acceptance — not left to be covered by general representations.
- If a FIRPTA withholding certificate is being sought, confirm that the purchase agreement includes appropriate provisions for escrowing the withholding amount pending IRS processing and for distributing the escrowed amount when the certificate is issued.
Questions About International Tax Due Diligence?
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This checklist is provided for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by use of this resource. Every transaction is unique — this checklist does not substitute for a comprehensive analysis by qualified counsel. All engagements are subject to a conflicts check and execution of an engagement letter.