What post-acquisition restructuring, if any, is typically carried out and why?
The nature of post-acquisition restructuring will largely depend on the nature of the acquirer’s existing business and the nature of the target company. Common considerations driving the need for restructuring include:
- whether the target company’s operations are similar to the acquiring business, such that they will be fully integrated into the same value chain, compared with being retained as a separate standalone business;
- whether the acquirer intends to retain the entirety of the acquired business or seek to dispose of certain parts of it in the immediate or medium term; and
- the extent of pre-transaction entity rationalisation that had already occurred pre-transaction or needs to occur post-transaction; in other words, winding up otherwise dormant finance and special purpose vehicle companies that were incorporated for the present or previous acquisitions.
In all cases, restructuring will be undertaken so that the resulting corporate structure is easy to administer (ie, reducing compliance expenditures payable for each active company) and minimises tax leakage (ie, reducing quantum of both domestic transactions between entities not in the same tax-consolidated group and cross-border transactions subject to withholding tax). Tax-efficient transactional arrangements may also be implemented, such as ensuring that each entity is financed by debt up to its maximum deductible allowance and maximises available deductions elsewhere such as through intercompany royalty or sale and leaseback arrangements.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?
Achieving tax-efficient spin-offs is possible but may be complex depending on the existing tax attributes of the relevant companies and their existing corporate structure. However, in broad terms, tax-efficient spin-offs can be achieved through reliance on the various reliefs and exemptions available to UK-resident shareholders:
- reorganisation treatment and rules exempting intra-group asset transfers can enable capital-reduction demergers to be tax neutral. However, tax neutrality for capital-reduction demergers requires that:
- the demerger is not being implemented in preparation for the disposal of either the demerged or retained businesses; and
- the demerged or retained businesses are carrying on trading activities; and
- where the relevant conditions are satisfied, a direct dividend demerger involving the intermediate parent’s distribution of shares in a subsidiary to its own parent can be treated as an exempt distribution.
In either instance, trading losses may be preserved provided care is taken not to breach the change of ownership restrictions on trading losses in Part 14 of the Corporation Tax Act 2010.
Depending on the demerger steps, it may be possible to mitigate the application of stamp duty through transferring shares for no consideration, implementing a share cancellation scheme or through reliance on stamp duty reconstruction relief.Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?Migration of UK tax residence
The migration of UK tax residence will always require that a company does not have its centre of management and control in the UK (ie, the highest level of decision-making in the company takes place outside the UK):
- where a company is tax resident in the UK because it is incorporated there, residence can only be migrated to another jurisdiction if, similar to the UK, that jurisdiction treats an entity as tax resident there if it is centrally managed and controlled there, and it has a double tax treaty with the UK that, if both jurisdictions assert residency, contains either a residence tiebreaker or mutual agreement procedure that prioritises the place of effective management and control over the location of incorporation (as per the OECD Model Tax Convention); and
- where a company is only tax resident in the UK because it is managed and controlled there, UK residence can be terminated by moving that management and control elsewhere. In this instance, whether residence is migrated to the new location of management and control will likely depend on if the company is also incorporated in that location and, if not, whether there is a double tax treaty between the incorporation state and new location of management and control.
Whether an entity is centrally managed and controlled from the UK or elsewhere is a question of fact. From the UK’s perspective, in resolving questions of residency, HMRC and the courts will usually look to:
- where the majority of directors physically reside or are tax residents;
- where the majority of board meetings and strategic decision making occurs; and
- whether decisions made in one jurisdiction are circumvented by decisions made elsewhere.
Various corporate controls can be put in place to manage this, depending on the preferred residency location for an entity.
Tax consequences of migration
The UK imposes an exit charge on companies ceasing to be UK resident. Broadly, the company is treated as having disposed of and immediately reacquired all of its capital assets at their market value when it leaves the UK, thus creating a charge to corporation tax on any latent capital gains. This exit charge may, however, be deferred on any assets that remain within the charge to UK corporation tax; that is, assets that are attributed to a UK permanent establishment of the migrating company. The substantial shareholding exemption may also apply to relieve tax on the deemed disposal of any shares held by the migrating company.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
In general, for all other loans longer than one year, the UK imposes withholding tax (WHT) at a rate of 20 per cent on interest payments with a UK source.
The UK does not impose WHT on loans capable of being outstanding for less than one year (short interest). In addition, there are various domestic exceptions to withholding obligations on longer loans, including, inter alia:
- the recipient or beneficial owner of the interest is a UK-resident company or permanent establishment that is subject to UK tax on that income;
- the interest is paid by a bank in the ordinary course of its business; or
- the interest is paid on a quoted Eurobond or qualifying private placements.
Payments of interest to EU countries were previously exempt from WHT by the Interest and Royalties Directive, but this was repealed with effect from 1 June 2021. For these outbound interest payments, companies must now rely upon the WHT provisions in the double tax treaty entered into with the relevant EU member state to reduce or eliminate UK WHT, consistent with the position of payments to non-EU member states.
The UK does not impose WHT on dividends unless dividends are paid by UK real-estate investment trusts. In this case, dividends are subject to WHT at a rate of 20 per cent if paid to non-resident shareholders, which can be reduced by double tax treaties.
The UK imposes WHT at a rate of 20 per cent on any royalties paid in respect of intangible assets (patents, copyright, design, model, plan, secret formulas, trademark, brand names and know-how). However, no withholding obligation arises where the recipient or beneficial owner of the royalty is a UK resident company or permanent establishment that is subject to UK tax on that income.
Similar to interest payments, royalties paid to EU member states no longer benefit from the Interest and Royalties Directive and therefore such relief is limited to the UK’s tax treaty network.Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
Profits may be extracted from a UK company through a variety of means, including dividends, interest and royalty payments, and other intercompany arrangements such as service fees.
As a base case, though not deductible for corporation tax purposes, the UK generally does not impose WHT on dividends. In contrast, though tax deductible (tax benefit equal to 19 per cent), WHT applies to both interest and royalties at a rate of 20 per cent. Therefore, at a high level both payment streams result in similar net tax burdens for the company (ie, because the 20 per cent withholding tax is largely offset by the 19 per cent tax deduction). However, further considerations are necessary:
- payment of dividends is subject to various company law requirements such as solvency tests, and therefore may not always be available. It is also more difficult to stream dividends to a particular recipient; and
- the UK’s double tax treaty network may reduce or eliminate the headline 20 per cent withholding rate applied to both interest and royalty payments, which can result in these being more tax efficient. However, limits on the quantum of interest and royalties are imposed by the UK’s thin capitalisation, transfer pricing and anti-hybrid rules.
As an alternative to dividends, interest or royalties, in certain circumstances intercompany arrangements such as service fees may be the most tax-efficient method of repatriating funds from the UK. This is because such payments are generally deductible and usually not subject to either withholding tax, thin capitalisation or anti-hybrid rules. Such payments usually form the basis of common transfer pricing-driven structures, where an entity’s quantum of taxable profits is reduced to a target level through these payments. However, such structures clearly depend on the UK entity receiving sufficient value from entities outside of the UK (eg, management services), for which such payments can be made without breaching the UK’s transfer pricing rules.