Key Factors in Structuring Cross Border Corporate Acquisitions

www.istructuring.com

Key Factors in Structuring Cross-Border

Corporate Acquisitions

A review of 2014 and a foretaste of 2015Roy Saunders, IFS Consultants

December 10 12:00 – 12:45 GMT

The dramatic changes in 2014

• BEPS

– Issue of double non-taxation is targeted

– Treaty network built on the assumption that profits are taxed in one country

– Concentration on Deliverables.

– Certain financing structures will cease to be effective (hybrid financing).

– Transfer Pricing, CbC Reporting.

• US Corporate Inversions.– Greatest number ever.

– US worldwide approach vs Territorial approach of UK and Ireland

• State Aid attacks by the EC– Luxembourg whistle blower.

– Apple, Amazon, Starbucks and Fiat challenged

• But - developing nations will go their own way.– More source taxation, or something close to it

– The management of double taxation?


BEPS and the OECD approach

• First Seven Deliverables—September 16, 2014

– Digital Economy Report

– Hybrid Mismatch Arrangements

– Review of Harmful Tax Practice Regimes

– Preventing Treaty Abuse

– Addressing TP aspects of Intangibles (Phase 1)

– Addressing TP documentation

– Multilateral Instrument Report


State Aid Investigations

• State aid:– Any aid granted by a MS / through State resources– Which distorts / threatens to distort competition– By favouring certain undertakings / goods

• Recent Investigations– Gibraltar: Rulings– Ireland: Alleged help to Apple– Luxembourg: Alleged help to Fiat– Luxembourg: Amazon– Netherlands: Starbucks

• Effect:– States might withdraw past tax concessions and seek repayment of tax– Advice to clients: risk of the attack if a regime is too good to be true


TARGET MERGER

COMPANY

SHAREOLDERS

UK

TARGET MERGER

COMPANY

UK

EXISTING

PARENT

COMPANY

US

EXISTING

SUBSIDIARY

COMPANIES

NON-US

Inter-group transfer

Share-for- share exchange

EXISTING

SHAREHOLDERS

US

CREATION OF NEW

HOLDING

COMPANY

UK

Share-for- share exchange

Resulting share ownership less than

80% US

UK tax free receipt of dividends

US Corporate Inversions: Example


Inversions: key tax issues

• Low corporate tax rate

• Accessing a territorial/exemption system

• Withholding on dividends

• Treaty network/EU Directives

• IP patent box

• Managing tax residence

• Stamp duty/SDRT

• Impact of recent proposals to change US tax law


Vodafone case - India

HTIL (Cayman)Vodafone

(Netherlands)

BVI Cos

CGP (Cayman)

Mauritius and

Indian cos

OperatingCo

(India)

Sale of shares

NON-INDIAN SOURCE

INDIAN SOURCE


Issues in Developing Countries

• Ensure tax indemnities exist and that any capital gains tax risk is clearly for the vendor

• Arrange escrow accounts wherever possible

• Utilise bilateral investment agreements as well as double tax treaties by investing from entities in relevant jurisdictions

• Treaty shopping may be challenged so ensure entities chosen have relevant substance


The impact of reform in 2015 and beyond

• BEPS

– Substance will be king.

– Multilateral Instrument to implement BEPS

– Treaty access denial

– TP Manuals to reflect location of profits, sales, employees and assets

• US Tax Reform.

– Eventually fewer incentives, balanced by lower rates.

• The shape of the future

– Less opportunities for structuring, but competition between countries remains.

– Fewer very low tax structures, but generally lower tax rates?

• Automatic Exchange of Information (AEOI)

– Common Reporting Standard


Reputation

• The reputational risk is far greater than tax savings through aggressive structuring

• Coordinated internal procedures need to be adopted when questions are asked in place that have been tested

• There needs to be a global response to local issues

• It takes 20 years to build a reputation and 5 minutes to lose it


Avoiding falling into Treaty Shopping problems

• Title of Double Tax Treaties

– for the avoidance of double taxation

– and the prevention of fiscal evasion

• Limitation on benefits provisions (second line of defence)


Beneficial Ownership and Substance

• Case law does not give conclusive definition

– Indofoods v JP Morgan, Prévost Car, MIL Investments, Velcro Canada Inc:

• Possession

• Use

• Risk

• Control

• Conduit companies must have proper degree of SUBSTANCE


Ensuring corporate management and control is where you want it

• Article 4 OECD MTC — “place of effective management” (POEM)

• National treatment — the incorporation theory

– The UK, the US, Ireland, Switzerland, the Netherlands

– Mobile POEM

• National treatment — the real seat theory (siège social, siège réel)

– France, Germany, Luxembourg

– Change of POEM leads to dissolution of the company


Development of Corporate Migration

• Business continuity

• A migrating company may remain intact with unbroken corporate history

• Shareholders do not need to crystallise gains and reinvest in assets

• Streamlining corporate structure and operations

• Planning for changes in laws and tax treaties

– Protection of foreign investors

– Corporate law regime

– Tax law: CFC, WHT, participation exemption, thin capitalisation

– Better treaty network and international agreements (including the EU Directives and ECJ case law)

• Joining substance and the shell to gain treaty benefits

• Improving image (e.g. in preparation for an IPO; anti-avoidance)

• Personal reasons (esp. owner-managed companies)


Methods of Migration

• Winding up and reincorporation• Transfer of legal domicile• Transfer of place of effective management • Share for share exchange• Merger migration under EU law• Societas Europaea


Summary of key tax issues on

Corporate Acquisitions & Mergers

Corporate level issues

• Tax residence

• Tax loss preservation

• Tax clawbacks

• Transfer taxes/capital

duty

• VAT issues

• EU cross border merger

tax rules

• On-going tax efficiency

Shareholder level issues

• Capital gains rollover

• EU cross border merger

tax rules

• Withholding on dividends


Summary of key intellectual property

issues on Corporate Acquisitions & Mergers

• Identifying valuable IP and ensuring it is properly registered where possible

– Copyrights

– Patents

– Trade Marks

– Design rights

– Know how/confidential information

– Databases

• Transferring IP into the appropriate group entity and keep an internal register of all IP

• Valuing IP for Balance Sheet purposes and using IP to finance future development

• Ensuring the company has ‘Freedom to Operate’


What is the IBSA

The International Business Structuring Association is the worldwide community for

practitioners dealing with international business structuring and regulatory compliance.

www.istructuring.comwww.istructuring.com

Vision of the IBSA

• Create a multi-disciplinary multi-jurisdictional association

of best practice professional advisers

• Promote transparency and integrity

• Develop greater knowledge and international contacts

• Enhance profile of younger advisers

• Reach out to the entrepreneurial community


Principles of the IBSA

• Commerciality

• Substance

• Transparency

• Integrity

• Knowledge

• Imagination

• Anticipation


Discussion Groups

• Transparency of International Business Structures –

issues relating to the OECD BEPS initiative

• Intellectual Property as a Value Proposition

• International Business Structures and Fiduciary

Relationships

• Corporate Finance: Public vs Private Equity


Who should join the IBSA

IBSA Members must meet qualification standards and be approved by IBSA members in good standing

International Business Structure Planning

Transfer Pricing

IP Valuation

and Structuring

Tax

Family Business

Structuring and

Planning

Mergers, Acquisitions

and Divestments

Market Exit

Strategies

Corporate Migration

Special Purpose Vehicles

Corporate Foundation and Agency

Services


To join the IBSA or find out more:



Law

Key Factors in Structuring Cross Border Corporate Acquisitions