Alternative Energy Partners Inc (AEGY)

[DarthYoda]

Acquisition Entity


If a Canadian corporation is purchasing shares of a U.S. C corporation, a direct acquisition may be considered. However, tax effective financing (outlined below) may necessitate the formation of a U.S. C corporation to be the vehicle that purchases the shares of the target. If a C corporation is formed to purchase shares of the target (which may be a C corporation, an S corporation, or an LLC), it may be used to purchase the shares of other U.S. C corporations and would benefit from consolidated reporting for U.S. federal taxes. Direct or indirect financing to the U.S. C corporation that is the acquisition vehicle may enable interest expense relating to the funds borrowed for the acquisition to be deducted in the U.S. against U.S. income. The interest if payable to a Canadian resident shareholder will not be subject to U.S. withholding tax (either because of the portfolio interest exemption or Article XI of the Canada-U.S. tax treaty).
A C corporation should be formed where assets are to be purchased. As indicated above, a Canadian corporation should not form a U.S. LLC to act as the acquisition vehicle. In addition to its branch tax problem outlined above, the treaty would also deny reduced withholding tax rates on interest, royalties, and dividends paid by the LLC to the Canadian resident. There is also a risk of the LLC being a resident of Canada if its central management and control is exercised in Canada. The saving provision in Article IV(3)(a) of the Canada-U.S. tax treaty, which deems a corporation formed in the U.S. to be a resident of the U.S., would not apply to an LLC.

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