While the M&A pipeline remains relatively strong, bringing deals to completion is proving challenging due to the tightening of available credit and uncertainty with asset valuations. In this climate, public limited companies, other large corporates and private equity houses are looking at alternative and more creative structures in order to gain access to deals that might not be available via traditional mergers and acquisitions.
The use of a Jersey joint venture vehicle is one such alternative structure, which can be used in a 'try before you buy' sense and as a precursor to traditional M&A activity in future.
Rather than using the home jurisdiction of one of the parties or the jurisdiction in which the joint venture's business is to be located, seeking a neutral venue to provide a level playing field for all parties is becoming more important. To this end, going offshore can offer a feasible solution.
The primary motivation for choosing an offshore jurisdiction is often to take advantage of favourable tax regimes that do not levy corporation tax on the profits of the joint venture vehicle. As a result, a tax-neutral position can be maintained for all participants.
There are both commercial and structural benefits to using a Jersey joint venture vehicle, some of which are as follows:
- Jersey company law is based on English company law, but offers greater flexibility (eg, in relation to capital extraction).
- Jersey has an extremely favourable corporate tax regime.
- No stamp duty applies on the transfer of shares in Jersey companies.
- Jersey's close proximity to London and location within the same time zone make closing transactions simpler.
- Fast-track formation of companies is available (on the same day if required).
- Two or more parties can easily pursue a partnership or strategic alliance.
- Investors can gain a better understanding of the assets or regions involved (before one of the parties decides to go it alone).
- Companies can gain exposure to new and emerging markets, especially where, for example, restrictive foreign ownership regulations apply.
- Jersey joint ventures go some way towards addressing the issue of a valuation gap between traditional M&A players, where markets are either (or both) unpredictable or volatile and uncertain due to external factors (eg, the European economy).
One of the key advantages of using a Jersey holding company is the flexibility of Jersey company law in relation to returns to investors - whether by means of dividend, redemption of share capital or share buy-back. In particular, moneys payable on the redemption of redeemable shares or on the buy-back of shares by a Jersey company may be funded from any source, including capital. A Jersey company may also make a distribution from a wide range of sources, not merely from distributable profits.
A Jersey holding company can also facilitate a tax-efficient exit through stamp duty savings and is suitable for an initial public offering.
A zero rate of income tax applies to virtually all Jersey companies.
However, if required, a Jersey company can be tax resident in another jurisdiction, provided that:
- it is centrally managed and controlled in a jurisdiction outside Jersey;
- it is tax resident in that other jurisdiction; and
- the highest rate of corporation tax in that other jurisdiction is 20% or above.
No stamp duty is payable on the transfer of shares in a Jersey company and there is no corporation or capital gains tax in Jersey. Furthermore, no annual taxes or charges are levied by reference to a company's authorised or issued share capital. Although Jersey has recently introduced a goods and services tax at a rate of 3%, companies beneficially owned outside Jersey that do not supply goods or services in Jersey will generally qualify for 'international service entity' status. This effectively brings such companies outside the scope of the goods and services tax regime, provided that a fee of £100 is paid each year.
Returns to investors can be structured by way of capital returns, by means of redemption or buy-back or through cash distributions (or a combination of these methods). Jersey company law is very flexible on the sources of funding for redemption of share capital and in relation to requirements for distributions.
Redemption and buy-back of shares
Moneys payable on the redemption of redeemable shares or on the buy-back of shares by a Jersey company may be funded from any source, including capital. The directors responsible for authorising the redemption or buy-back payment must make a statement that:
- they have formed the opinion that, immediately following the date on which the payment is to be made, the company will be able to discharge its liabilities as they fall due; and
- having regard both to the prospects of the company and intentions of the directors with respect to the management of the company's business, and to the amount and character of the financial resources that will (in their view) be available to the company, the company may continue to carry on business and discharge its liabilities as they fall due for a period of 12 months after the date of such payment (or, if sooner, a solvent winding-up of the company).
Therefore, provided that the solvency statement can be made, there is considerable flexibility in funding the redemption or share buy-back.
A Jersey company may make a distribution from a wide range of sources, not merely from distributable profits. Therefore, distributions may be made from capital without court approval being needed for a reduction of capital (as was previously the case).
A distribution may be debited from any account of the company (including the share premium account and the stated capital account) other than the capital redemption reserve or the nominal capital account. Distributions may be made from the stated capital account of a no-par-value company, but not the nominal share capital of a par-value company - this may lead to an increased use of no-par-value companies in the future.
A distribution may be made only if the directors authorising the distribution make a solvency statement in the form referred to above.
Jersey company law historically prohibited a company from giving financial assistance in respect of an acquisition of its own shares. This prohibition has now been removed and the amendments make clear that any previous common law prohibition on financial assistance is not renewed by virtue of the removal of the statutory prohibition.
An acquisition often involves the issuance of loan notes in connection with the acquisition financing. The Channel Islands Stock Exchange (CISX) was designated by the UK Inland Revenue as a recognised stock exchange in 2002, under Section 841 of the UK Income and Corporation Taxes Act 1988. This designation means that qualified debt securities listed on the CISX are eligible for the quoted Eurobond exemption, which allows an issuer within the UK tax net to make payments of interest on the listed securities gross without deduction for tax.
Jersey incorporated companies are increasingly being used for listing on the Alternative Investment Market of the London Stock Exchange, as well as on the exchange's main board.
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