Post-acquisition planning

Restructuring

What post-acquisition restructuring, if any, is typically carried out and why?

Any post-acquisition restructuring is ordinarily driven by the ongoing business goals of the acquirer group and how it intends the newly acquired business to operate within it. In particular, how much the acquirer wishes to integrate the target, or the target’s business, into its wider operations will be key.

Some common post-acquisition restructuring includes:

  • positioning the business operations of the acquired target alongside any similar operations within the wider group (including within any fiscal unities that apply, considering the location of any employees, streamlining the corporate chain of command and simplifying any compliance obligations);
  • rationalising intra-group supplies of goods and services;
  • segregating different elements of the group’s business into different group entities (in relevant jurisdictions) for the purposes of:
    • hiving off group business (or business assets) in preparation for a future sale (or otherwise);
    • separating the trading and investment activities of a group (perhaps so that trading businesses can qualify for certain UK tax reliefs, in particular, the substantial shareholding exemption and business asset disposal relief (formerly entrepreneurs’ relief);
    • organising the equity (and investment) profile of different parts of the business; and
    • separating businesses with different risk, regulatory or commercial profiles; and
  • rationalising intra-group finance arrangements (maximising available deductions for any debt financing and minimising any exposure to UK withholding tax on interest).

 

Achieving the commercial objectives listed above in a tax-efficient way (both with regards to the reorganisation itself and considering any future tax-leakage up the structure) should be considered as part of any reorganisation or integration strategy.

Spin-offs

Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?

Yes. Any such transaction may typically be effected by way of a corporate demerger or a hive-off and businesses undergoing such transactions will want to minimise any tax charges arising.

 

Demerger

A demerger involves the company transferring assets (being either a business or shares in a subsidiary) to some or all of its shareholders (or to a new company owned by such shareholders).

A demerger is usually effected via a dividend in specie (whether directly or indirectly). UK corporate law requires the distributing company to have sufficient distributable reserves to cover the book value of the demerged subsidiary (or the assets) in the company’s accounts.

Demergers that satisfy the conditions set out in the tax legislation should qualify as exempt distributions and should not trigger charges to income tax, capital gains tax or corporation tax (either at shareholder or company level).

If a demerging company does not have sufficient distributable reserves, a demerger may be effected by reducing the capital of the demerging parent and transferring the asset being demerged to shareholders as a repayment of capital. However, for any such distribution to be tax neutral, the amount of the repayment of capital must equal the market value of the business or shares to be transferred (and certain other conditions in the tax legislation must be satisfied).

Achieving a tax-efficient demerger is complex and care needs to be taken in relation to various potential tax implications, including preservation of trading losses, mitigation of stamp duty implications etc.

 

Hive-off

A hive-off is frequently used when a company wishes to isolate certain business assets and sell them to a third party (namely, dispose of them out of the group).

As part of a hive-off a company will transfer the business assets it wishes to sell to a subsidiary (namely, down the corporate structure), which will normally be newly incorporated and free of historic liabilities, on a tax-neutral basis. The shares in the subsidiary company will then be sold to a third party.

As part of the hive-off, it is possible for the transferred subsidiary to use the trading losses associated with the trade that has been transferred in its future accounting periods. However, this will be subject to the transferred subsidiary continuing the transferred trade and satisfying certain other conditions within the tax legislation and such use will be subject to certain restrictions and anti-avoidance provisions. Any unused capital losses, surplus management expenses and non-trading deficits within the seller company cannot be transferred as part of the hive-off.

Although the initial transfer of business assets can typically be achieved on a tax-neutral basis, the disposal of the relevant subsidiary may trigger degrouping charges and (or) the clawback of reliefs claimed as part of the initial transfer. If the conditions for the substantial shareholding exemption are met, this may eliminate any degrouping charges.

Migration of residence

Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?

A UK tax resident company may change its jurisdiction of tax residence. This will commonly be effected by it transferring its central management and control to another jurisdiction and, where the UK tax resident company is also UK-incorporated, relying on a residence tie-breaker provision in an applicable double tax treaty. However, the process to achieve tax migration is often difficult to navigate (especially for UK-incorporated UK tax resident companies) and should be carefully managed.

As part of any such migration:

  • the migrating company will give notice to His Majesty’s Revenue and Customs (HMRC) of its intention to cease to be resident in the United Kingdom and ask HMRC to approve arrangements by the company for the payment of outstanding tax liabilities;
  • the migrating company will be deemed to have disposed of and reacquired all of its assets at market value immediately before it ceases to be UK resident – any resultant chargeable gain will be liable to UK corporation tax (creating an exit charge);
  • such exit charge may be deferred in relation to any assets that remain within the charge to UK corporation tax (eg, assets that are attributed to a UK permanent establishment of the migrating company); and
  • if the jurisdiction to which the company is moving its residence does not make a matching adjustment to the base cost of the company’s assets for local tax purposes to reflect the applicable UK exit charge there will be a risk of double taxation. Following Brexit, the United Kingdom can no longer automatically rely on EU law (namely, Directive (EU) 2016/1164 (the EU Anti-Tax Avoidance Directive), as amended in 2017, to mitigate this risk.

 

A UK tax resident company may often be able to achieve results similar to a corporate migration from a tax perspective, but without the exit charges, by inserting a new, non-UK resident, holding company above itself (a corporate inversion or flip).

Provided that the corporate inversion is structured correctly and is not being implemented for tax avoidance purposes, it should be possible to effect the transaction without any stamp duty becoming payable and frequently without adverse tax implications for shareholders.

Interest and dividend payments

Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?

Interest

Under UK domestic law, payments of interest that have a UK source are subject to a withholding tax (WHT) at the basic rate of 20 per cent. However, various exemptions are available, most notably:

  • interest on loans less than one year in duration, unless they are capable of being rolled over into successive loans that could exceed one year;
  • interest paid to a company that is either a UK tax resident or has a UK permanent establishment that is subject to UK tax on its income;
  • interest paid by banks in their ordinary course of business; and
  • interest paid on quoted Eurobonds (debt listed on a recognised stock exchange or admitted to trading on a multilateral trading facility operated by a regulated recognised stock exchange) or qualifying private placements.

 

From 1 June 2021, payments of interest to associated companies in European Union (EU) countries are no longer exempt from WHT and WHT on payments to recipients in other jurisdictions may only be reduced or eliminated in cases not falling within an exemption (such as those listed) if a relevant double tax treaty applies.

 

Dividends

No WHT obligation arises in the United Kingdom on dividend payments, except where dividend payments are made by real estate investment trusts.

 

Royalties

Payments of royalties in respect of intangible assets (eg, patents, copyright, trade mark, design, etc) are subject to WHT at the basic rate (20 per cent) unless the recipient is UK tax resident or acting through a UK permanent establishment.

From 1 June 2021, payments of royalties to associated companies in EU countries are no longer exempt from WHT and WHT on payments to recipients in other jurisdictions may only be reduced or eliminated if a relevant double tax treaty applies.

Tax-efficient extraction of profits

What other tax-efficient means are adopted for extracting profits from your jurisdiction?

The most common means of extracting profits from a UK-based company are via dividends, interest payments on intra-group loans, royalty payments and other payments for intra-group services. The UK does not generally impose withholding tax (WHT) on payments of dividends. However, dividend distributions are not deductible for corporation tax purposes and are paid out of post-tax profits. There are company law restrictions on when a distribution can be made (sufficient distributable reserves are required and certain solvency tests must be met) and to whom (generally, distributions must be paid pro rata to all members of a relevant share class).

The United Kingdom does apply WHT on payments of UK source interest and UK royalty payments at a rate of 20 per cent. However, any WHT may be subject to relief under the UK’s network of double taxation treaties and the underlying payments should (subject to anti-avoidance rules) be deductible for corporation tax purposes (noting the rate of UK corporation tax is 19 per cent as at the date of publication). Subject to the availability of treaty relief, therefore, distributions and payments of interest or royalties often result in a broadly equivalent UK tax burden. However, restrictions on the deductibility (and other tax treatment) of interest and royalties are imposed by the UK’s transfer pricing and anti-hybrid rules and, further, any intra-group payment structures must generally comply with the UK’s anti-avoidance provisions (which may disregard arrangements with no commercial purpose and designed wholly or mainly, for the purposes of avoiding, deferring or reducing a liability to tax).

If there is commercial justification, intercompany payments for services may also be a tax-efficient way of repatriating funds from the United Kingdom – in principle, such payments should be deductible for UK corporation tax purposes and, should not be subject to either WHT or anti-hybrid rules. However, any such intercompany arrangements will be subject to the UK’s transfer pricing rules and general anti-avoidance considerations, so any proposed structure should ensure that the UK entity is receiving justifiable value from entities outside of the United Kingdom in return for any payments received.