DealLawyers.com Blog

This HLS Blog post from Wachtell succinctly summarizes some of the key provisions of the One Big Beautiful Bill Act that will impact domestic and cross-border M&A.

On the domestic front, the OBBBA makes permanent several taxpayer-favorable TCJA provisions.

– Taxpayers will again be entitled to deduct immediately 100% of the cost of depreciable tangible assets, likely increasing the appeal of acquiring assets as compared to stock.

– The deduction for up to 20% of the business income of certain noncorporate investors in certain pass-through entities is made permanent, preserving the tax efficiency of partnership, rather than corporate, joint venture structures for those investors.

– The OBBBA permanently restores the pre-2022 TCJA limitation on interest expense deductions by applying the 30% limit to an amount that approximates EBITDA, rather than EBIT.  But it imposes new limits by excluding from the EBITDA calculation certain foreign-source items of income.  The net impact of these changes on particular leveraged transactions will need to be assessed.

For U.S. multinationals, the OBBBA is a mixed blessing.

– It widens the scope of income of U.S.-parented “controlled foreign corporations” (“CFCs”) that is subject to current federal income taxation, but generally improves the U.S. parent company’s ability to credit foreign income taxes.  Specifically, GILTI (the TCJA’s tax on CFC earnings in excess of a deemed 10% return on tangible assets) is replaced with a more costly tax on “net CFC tested income,” a concept that does not reflect a deduction for the return on tangible assets.

– However, the OBBBA liberalizes the foreign tax credit regime by increasing the amount of foreign taxes that may be credited against net CFC tested income and by no longer requiring interest expense and research and experimental expenditures to be allocated against such income.

– The OBBBA also revises the treatment of mid-year sales of CFCs, requiring a pro rata income allocation based on the period of stock ownership.

It urges M&A participants to understand the new law (many provisions of which are effective for tax years beginning after December 31, 2025) and take it into account when negotiating pricing, transaction structure and deal terms.

– Meredith Ervine