What post-acquisition restructuring, if any, is typically done and why?
The nature of the post-acquisition restructuring will largely depend on the nature of the acquirer’s existing business and the nature of the target company. Common considerations leading to the need for restructuring include:
- whether the operations of the target company are similar to those of the acquiring company, so that they will be fully integrated into the same value chain, as opposed to being kept as a separate stand-alone company;
- whether the acquirer intends to keep all of the acquired business or seeks to sell parts of it in the immediate or medium term; and
- the extent of the entity’s rationalization before the transaction that had already occurred before the transaction or that is expected to occur after the transaction; in other words, the liquidation of otherwise dormant finance and special purpose vehicle companies that have been incorporated for current or previous acquisitions.
In all cases, the restructuring will be undertaken so that the resulting business structure is easy to administer (i.e., reducing the compliance expenses payable for each active business) and minimizing tax leakage ( i.e. by reducing the amount of the two national transactions between entities that are not in the same tax regime). – consolidated and cross-border group transactions subject to withholding tax). Tax-efficient transactional arrangements can also be implemented, for example by ensuring that each entity is financed by debt up to its maximum deduction and by maximizing the deductions available elsewhere, for example through intercompany royalties or ‘sale-leaseback agreements.
Can tax neutral divisions of companies be carried out and, if so, can the net operating losses of the divided company be preserved? Is it possible to carry out a spin-off without triggering transfer rights?
It is possible to carry out tax-efficient spin-offs, but this can be complex depending on the existing tax characteristics of the companies concerned and their existing business structure. However, in general terms, tax-beneficial benefits can be achieved by relying on the various reliefs and exemptions available to UK resident shareholders:
- the reorganization treatment and the exemption rules for intra-group asset transfers may allow spin-offs with capital reduction to be tax neutral. However, the fiscal neutrality of spinoffs with a reduction in capital requires that:
- the demerger is not implemented with a view to the sale of the split or retained activities; and
- the companies split up or retained carry out commercial activities; and
- where the relevant conditions are met, a split of direct dividends involving the distribution by the intermediate parent company of shares of a subsidiary to its own parent company may be considered an exempt distribution.
In either case, trading losses can be preserved as long as care is taken not to violate the change of ownership restrictions on trading losses in Part 14 of the Corporation Tax Act 2010.
Depending on the stages of the demerger, it may be possible to mitigate the application of stamp duty by transferring shares without consideration, by implementing a share cancellation program or by relying on a relief from the stamp duty. reconstruction of stamp duty.
Is it possible to migrate the residence of the acquisition company or the target company from your jurisdiction without tax consequences?
Migration from UK tax residency
Migration from UK tax residency will still require a business not to have its UK administration and control center (i.e. the highest level of decision making in the UK). (business takes place outside the UK):
- where a company is resident for tax purposes in the United Kingdom because it is incorporated there, residence can only be transferred to another jurisdiction if, as in the United Kingdom, that jurisdiction considers an entity to be resident for tax there if it is centrally managed and controlled there, and has a double taxation treaty with the United Kingdom which, if both jurisdictions claim residence, contains either a residence tie-breaker procedure or a mutual agreement procedure which gives priority to the place of effective management and control over the place of incorporation (in accordance with the OECD model tax convention); and
- where a business is only UK tax resident because it is managed and controlled there, UK residence can be terminated by moving that management and control elsewhere. In this case, the migration from the residence to the new place of management and control will probably depend on whether the company is also incorporated there and, if not, on the existence of a double taxation agreement between the State of incorporation and the new place of management. and control.
Whether an entity is centrally managed and controlled from the UK or elsewhere is a question of fact. From a UK perspective, in resolving residence issues, HMRC and the courts will generally seek to:
- where the majority of directors are physically or are tax residents;
- where the majority of board meetings and strategic decision-making take place; and
- if decisions taken in one jurisdiction are circumvented by decisions taken elsewhere.
Various corporate controls can be put in place to handle this, depending on an entity’s preferred place of residence.
Tax consequences of migration
The UK imposes exit fees on companies that cease to be UK residents. In general, the company is considered to have sold and immediately bought back all of its fixed assets at their market value when it leaves the United Kingdom, thus creating a corporate tax charge on any capital gain. the tent. These exit charges may however be deferred on all assets which remain subject to UK corporation tax; i.e. assets which are attributed to a UK permanent establishment of the migrant company. The substantial participation exemption may also apply to alleviate the tax on the deemed disposal of any share held by the migrant company.
Interest and dividend payments
Are interest and dividend payments made outside your jurisdiction subject to withholding taxes and, if so, at what rates? Are there national exemptions from these deductions or are they treaty dependent?
In general, for all other loans over one year, the UK applies a withholding tax (WHT) at a rate of 20 percent on interest payments with a UK source.
The UK does not impose a WHT on loans with less than one year outstanding (short interest). In addition, there are various national exceptions to withholding taxes on longer loans, including:
- the beneficiary or beneficial owner of the interest is a company or permanent establishment resident in the United Kingdom and subject to United Kingdom tax on such income;
- interest is paid by a bank in the normal course of business; Where
- interest is paid on a listed Eurobond or on eligible private placements.
Interest payments to EU countries were previously exempt from WHT by the Interest and Royalties Directive, but this was repealed with effect from June 1, 2021. For these outgoing interest payments, companies must now be based on the provisions of WHT in the double taxation agreement entered into. with the EU member state concerned to reduce or eliminate the UK WHT, in accordance with the position of payments to non-EU states.
The UK does not impose a WHT on dividends, unless the dividends are paid by UK real estate investment trusts. In this case, dividends are subject to the WHT at a rate of 20 percent if paid to non-resident shareholders, which rate may be reduced by double taxation treaties.
The United Kingdom imposes the WHT at the rate of 20 per cent on all royalties paid for intangible assets (patents, copyrights, designs, models, plans, secret formulas, registered trademarks, brand names and know-how ). However, no withholding obligation arises where the beneficiary or beneficial owner of the royalty is a UK resident company or a permanent establishment which is subject to UK tax on such income.
Like 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 network of tax treaties. United.
Tax-efficient extraction of profits
What other tax-efficient ways are being adopted to extract profits from your jurisdiction?
Profits can 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 baseline scenario, although not deductible for corporate tax purposes, the UK does not generally impose a WHT on dividends. In contrast, although tax deductible (tax benefit equal to 19 percent), the WHT applies to both interest and royalties at the rate of 20 percent. Therefore, at a high level, the two payment streams result in similar net tax burdens for the business (i.e., because the 20 percent withholding tax is more than offset by the tax deduction of 19 percent). However, other considerations are necessary:
- the payment of dividends is subject to various corporate law requirements, such as credit testing, and therefore may not always be available. It is also more difficult to pay dividends to a particular beneficiary; and
- the UK network of double taxation treaties can reduce or eliminate the 20 percent withholding tax rate applied to both interest and royalty payments, which can make the latter more tax efficient. However, limits on the amount of interest and royalties are imposed by thin capitalization, transfer pricing and UK anti-hybrid rules.
As an alternative to dividends, interest or royalties, in certain circumstances, intercompany agreements such as service charges may be the most tax efficient method of repatriating funds from the UK. This is because these payments are generally deductible and are generally not subject to withholding tax, under-capitalization or anti-hybrid rules. These payments typically form the basis of common transfer pricing-based structures, in which the amount of an entity’s taxable profit is reduced to a target level through these payments. However, such structures are clearly dependent on the UK entity receiving sufficient value from entities located outside the UK (e.g. management services), for which such payments can be made without breaking UK rules in transfer pricing.