Despite the current economic uncertainty around the world, the UK markets remain highly attractive for international businesses seeking to expand into new territories.
UK corporate lawyers are increasingly being engaged by overseas businesses that are seeking to enter the market, with strategy discussions rightly happening long before an actual transaction is commenced.
It is at this strategy stage that tax considerations became a critical component in the overall commercial strategy to ensure the maximum efficiency, both of the market entry and of the ongoing operation and profit extraction. This article looks at some of the key tax-commercial issues that may shape the market entry.
What’s best commercially?
Whilst we will see below that tax is indeed a crucial aspect for consideration, our approach with clients is always to start with their commercial objectives and goals and then focus in on the best way, from a tax perspective, to achieve these aims. So the logical starting point is to consider what sort of market entry is favoured.
The client could be considering establishing a branch of its existing business, acquiring a competitor, forming a joint venture of some sort with a UK business or even accessing the UK market in a remote fashion. Each of these options will have commercial pros and cons, including the speed at which each facilitates a market entry, the cost and risk of the venture and the amount of control the entering party will need over the operation.
This article focuses on market entry by business acquisition as a means of quickly obtaining market share (as opposed to organic opening of a new branch) and having full control of the venture, post-entry (as opposed to a JV or form of partnership agreement that requires collaboration and compromise).
Identify target business
Once your client has identified a target business interested in selling, discussions will unfold as to the nature of such a deal, with classic considerations around whether shares or the assets that should be acquired.
There are various pros and cons to be considered here, tax or otherwise but as a general rule of thumb, a buyer acquiring the shares in a company will be causing the least interruption to the operation and continuity of the business, but in return will be taking over responsibility for the historic liability of the corporate entity. That’s where us corporate and tax lawyers come in, to negotiate and contractually mitigate such historic risks as best as possible.
Buying the assets is of course less risky from a historic risk perspective but may prove more cumbersome from an operational point of view, especially if the business has third party agreements, licences or regulatory permissions that could be tricky or time-consuming to acquire or assign. Remember we are entering the market with speed and precision! (and thus getting a jump on our competitors).
Acquisition Structure
This may depend on whether or not the deal is shaping up as an asset or a share purchase, but some of the tax considerations are as follows:
Asset Purchase
If your client is entering the market by acquiring the assets of a UK business, we need to think about the appropriate acquisition vehicle into which to buy those assets. The client or “parent” entity is established overseas and so the choices are to either hold the assets directly by the parent or some other overseas subsidiary vehicle, or to create a UK subsidiary into which the assets are acquired.
The tax difference in broad terms is that a UK subsidiary will itself be taxed as a UK company on the business it will operate, whereas an overseas parent holding the assets of the UK trade will be taxed on the basis that it has a permanent establishment (“PE”) in the UK.
There are a number of technical tax distinctions which need to be weighed up here, taking account of the specific jurisdiction in which the particular “parent” entity is based. These distinctions cover how profit is determined for Corporation Tax purposes, and what is allowable as a deduction, the way financing is treated and taxed, treatment of losses, profit extraction, interaction with other international third parties and importantly the tax treatment on a sale of the business. A proper tax assessment of the most efficient option should be carried out.
Share Purchase
If the business purchase is to be structured by share acquisition, a similar question around acquisition vehicles should be considered. Broadly speaking, this will involve considering whether the UK target company should be purchased directly by the “parent” buyer or whether the parent will create an intermediate acquisition vehicle under which the shares in the UK target will be held. Such intermediate vehicle could itself be in the UK or in a different jurisdiction.
Quite how this picture is painted will often be shaped by the proposed nature of financing and corresponding repayment of finance/profit extraction, together with one eye on possible future sale of the UK target.
At this point, a detailed tax analysis will be needed of the relationship between the UK and the parent/alternative acquisition holdco jurisdiction. For example, is there a double tax treaty in place? How is the payment of interest and dividends taxed in both jurisdictions? How would any future sale of shares in the UK target be taxed?
The answers to these technical questions will provide clarity on the most tax-efficient acquisition structure for the particular deal at hand.
For further information on tax restructuring support for your clients, contact: info@winslows.co.uk
