Cross-border M&A tips and traps (2023)

Tuesday 28 February 2023

Sophia van Straalen

De Brauw Blackstone Westbroek, Amsterdam

sophia.vanstraalen@debrauw.com

Report on the session of the Taxation Section at the 12th Annual London Finance and Capital Markets Conference in London

Tuesday 17 January 2023

Session Chair

Jodi Schwartz Wachtell, Lipton, Rosen & Katz, New York

Speakers

Guillermo Canalejo Lasarte Uria Menendez, Madrid

Francesco Gucciardo Aird & Berlis, Toronto

Reto Heuberger Homburger, Zürich

Mike Lane Slaughter & May, London

Amelia O'Beirne A&L Goodbody, Dublin

Matthias Scheifele Hengeler Mueller, Munich

Clemens Schindler Schindler Rechtsanwälte, Vienna

Introduction

During the session, the panel discussed a selection of developments and trends in cross-border M&A structures. The panel started with cross-border demergers, split-ups and spin-offs. Various Canadian, Irish and Swiss structures were presented. Then cross-border leveraged buyouts were discussed based on a German case study. The panel continued with cross-border joint ventures (JVs), zooming in on Pillar II complications and a recent Spanish case. The final developments presented were migrations and conversions, mainly focusing on European Union developments in this respect.

Panel discussion

Cross-border demergers, split-ups and spin-offs

Canada

Francesco Gucciardo reported on Canadian spin-offs. A spin-off to shareholders in the form an in-kind distribution of spin assets is taxable in Canada. Therefore, a spin-off is generally structured as a tax-free 'butterfly reorganisation' consisting of multiple steps:

Provided that these steps are followed and no butterfly denial rules (on shareholder continuity and asset continuity, as well as qualifying assets and anti-stuffing) apply, each deemed dividend will not be re-characterised as proceeds, so no taxable capital gain arises.

Although a butterfly reorganisation consists of many Canadian steps, Jodi Schwartz noted that in a United States disclosure, these steps are ignored and the transaction is treated as a tax-free distribution. Her main takeaway was to always discuss whether clients want a tax-free spin-off in Canada.

Ireland

Amelia O'Beirne presented two Irish spin-off structures. The first is often used by Irish-incorporated, US-listed companies.

A new Irish company (SpinCo 2 PLC) is established outside the existing group headed by PLC, a public Irish company.

A pre-spin reorganisation is effected by the PLC group to separate assets that should spin, held by SpinCo 1.

The SpinCo 1 shares are transferred to SpinCo 2 PLC in exchange for the issuance of ordinary shares by SpinCo 2 to the shareholders of PLC.

PLC declares a dividend to its shareholders.

In Ireland, this spin-off can be effected on a tax-free basis. Tax reliefs are available for: (1) capital gains tax (although there is no step-up in basis for SpinCo 2 PLC); (2) stamp duty, provided the requirements are met; and (3) dividend withholding tax because there is no taxable distribution.

The second structure is a spin combined with a foreign merger. This is one example in the Irish market.

Shareholders hold preference shares in the public Irish company PLC that are being redeemed by PLC in exchange for SpinCo ordinary shares that are issued to the shareholders.

SpinCo then merges with a merger company that may be a foreign company. The Irish dividend withholding tax treatment is to be considered.

Schwartz commented that a redemption exchange offer is a new trend that she has noticed and that she expected more deals in the Irish market to come in the next few months.

Switzerland

Reto Heuberger presented a typical and often used Swiss demerger structure.

In this structure, there is a selling company that has a subsidiary with two businesses. One of the businesses is transferred to a target company. This is followed by the sale of the shares in the target company.

Both businesses need to be continued for two to three years. The sale and purchase agreement (SPA) generally includes a covenant and tax indemnity to cover this.

In response to this practical SPA tip, Schwartz's advice was that local lawyers should be asked whether specific items should be covenanted in the SPA to protect a spin-off.

Returning to the structure, if the target company owns intellectual property (IP) and this is transferred intragroup, this should take place at a fair market value. There is a taxable gain at the level of the target company and a step-up in basis for the purchaser. Pillar II has caused some issues because no step-up is provided under the transitional rules. A solution is a separate asset deal or a merger of the two entities involved, provided the purchaser continues the business in Switzerland.

Clemens Schindler replied that a tax-neutral spin within the EU based on the Mobility Directive should be possible to achieve a cross-border spin in one step rather than a domestic spin followed by a cross-border merger.

Cross-border leveraged buyouts

Matthias Scheifele presented a German case study to illustrate the impact of some current developments, for example, anti-hybrid rules and transfer pricing regulation. Based on the case study, a discussion arose on global intangible low-taxed income (GILTI) taxation in the context of the deduction/no-inclusion mismatch under the Anti-Tax Avoidance Directive (ATAD). Mike Lane mentioned that GILTI is not a relevant form of taxation from a United Kingdom perspective, whereas it is a relevant form of taxation from an Irish perspective according to O'Beirne. Heuberger commented that, in Switzerland, this is still unclear. The Swiss tax authorities look at the OECD for guidance because Switzerland is not familiar with controlled foreign company (CFC) rules. Scheifele noted that the German tax authorities are still considering how to treat GILTI. Schwartz commented that, in the US, she does not expect any major new tax legislation in the coming two years.

Cross-border JVs

Lane shared his experiences on the impact of Pillar II on JV structures and other cross-border M&A transactions. He has noticed that Pillar II is becoming an important factor and has an impact on pricing/modelling and the deal structure, as well as deal protection/allocation. In light of Pillar II, more information on the JV partner should be obtained than was common in the past. Schwartz agreed and expected more tax covenants to cover Pillar II and market practice to develop in this respect.

After these general remarks on Pillar II, Guillermo Canalejo Lasarte continued with a recent cross-border M&A transaction in Spain regarding La Liga, the Spanish football association. Complicating factors were that La Liga is a non-profit association, which is a contractual arrangement in which football clubs participate, and that it holds valuable broadcasting rights that cannot be transferred. A complicated structure was implemented, thereby making it possible to monetise this asset after all.

Migrations and cross-border conversions

Schindler reported on the final trend: migrations and cross-border conversions. Developments in secondary EU law are key in this respect, including the Merger Tax Directive, which has already been implemented, and the Mobility Directive, which is to be implemented by Member States before 31 January 2023. The Mobility Directive provides rules for cross-border conversions, which are effectively migrations in which a company changes its legal form to that of another jurisdiction. Schindler mentioned various tax and other reasons to structure a transaction as a migration instead of another type of transaction. He concluded with remarks on exit taxes that are to be considered in the case of a cross-border transaction.

Conclusion and final remarks

The panellists discussed various developments and trends in cross-border M&A transactions and shared their experiences. The panellists expect to see a continuance of cross-border spin-offs, JVs and conversions. Some tips and tricks, but also traps in and from the perspective of different jurisdictions, were shared that may be helpful in future transactions.