A trade sale is a common way to sell a business, where one company sells itself to another company, usually within the same industry. There are two main types of trade sales: asset sales and stock sales, and foreign companies should really think about the tax effects of each option. Let’s dive into each one separately:
In an asset sale, typically, only certain assets of the company are sold, rather than the entire business. The seller generally retains ownership and any liabilities, while the buyer picks up specific assets.
For sellers, the tax treatment of any gains or losses from an asset sale depends on how the company is structured:
For example, if the seller is a C corporation, it usually faces double taxation. The corporation pays taxes on the gains, and then shareholders might owe personal income tax on any money they receive.
If the seller is a pass-through entity, such as an S-corporation or a partnership, then the profits are distributed directly to the shareholders or partners. Usually, they get taxed at the lower capital gains tax rate.
Foreign companies selling U.S. assets may be subject to federal income tax on gains. If the assets include real estate, the buyer might withhold potential FIRPTA (Foreign Investment in Real Property Tax Act) tax of 15% (as of 2025). The tax rate could be reduced if a tax treaty applies.
In a stock sale, the ownership of the company is sold, meaning the seller loses part of their ownership stake. The attractive aspect of stock sales is that any profits are typically taxed as capital gains, regardless of the target company’s organizational structure, which differs from asset sales.
A foreign investor might want to buy U.S. real estate through a U.S. corporation. If this corporation holds the real estate, any gains from selling its stock may be taxed in the U.S. as effectively connected income.
On the flip side, if a foreign investor pours money into U.S. stocks directly, they usually don’t have to worry about capital gains tax on those stocks, which is great news for Non-Resident Aliens.