The international tax aspects of 'de-SPACing'

Thursday 12 May 2022

Heikki Wahlroos

Borenius Attorneys, Helsinki

Report on a conference session at the 11th Annual IBA Finance and Capital Markets Tax Virtual Conference 2022

Session Chair

Pamela Endreny Gibson, Dunn & Crutcher, New York


James Anderson Skadden Arps Slate Meagher & Flom, London

Delcia Capocasale Puga Cuatrecasas, Barcelona

Francesco Gucciardo Aird & Berlis, Toronto

James Somerville A&L Goodbody, Dublin

Pieternel Verhoeven NautaDutilh, Amsterdam

Christian Wimpissinger Binder Grösswang Rechtsanwälte, Vienna


Pamela Endreny started the session by introducing the panel and explaining what special purpose acquisition companies (SPACs) are and how they are used in the financial markets. She then summarised the different phases of the SPAC timeline: (1) formation of the SPAC by sponsors; (2) raising of funds from capital markets with the aim to find a private company and acquire it; and (3) the de-SPAC phase, in which the target is acquired. Endreny then went through the session agenda.

Recent de-SPAC trends

James Anderson described recent trends in the de-SPAC process, which include:

  • the de-SPAC transaction being effectively a merger of equals (very limited recourse for tax; often no tax indemnity and warranties do not survive closing; and importance of tax due diligence and pricing in tax risk/costs, eg, stamp duty);
  • 11th-hour deal sweeteners, including the role of anchor investments, both at the initial public offering (IPO) phase and de-SPAC phase, and tax implications related to a transfer of founder shares (known as the 'promote') by sponsors to anchor investors or forfeiture of the promote;
  • incentives for target management (roll-up and director arrangements);
  • VAT leakage, which is particularly relevant for European SPACs; and
  • SPAC tax residence.

James Somerville further complemented the VAT commentary regarding sufficient service arrangements to ensure VAT deductions in European Union holding entities, as well as the impact of offshore substance rules in the EU (Anti-Tax Avoidance Directive (ATAD) 3).

Characterisation of founder shares and other sponsor considerations​​​​​​​

Pieternel Verhoeven introduced the role of sponsors in the SPAC, and how the sponsors' role as both the SPAC's initial investors and its managers is structured. Typically, the sponsor investment comprises sponsor shares, which are subordinated to public shares, and sponsor warrants, which become exercisable at the de-SPAC phase.

The tax treatment of sponsors upon de-SPAC, where warrants and sponsor shares are converted into public shares, varies per jurisdiction.

Anderson then summarised the key United Kingdom tax aspects regarding sponsor tax treatment. While it is usually possible for non-executives to subscribe for shares at the IPO phase without tax consequences, it remains crucial to ensure that there is no dry tax cost at the de-SPAC phase when the sponsor shares are converted into ordinary stock. In the UK, one would typically use non-convertible shares, if commercially feasible, or work around technical solutions if convertible shares must be used. Also, careful planning is required if shares are transferred to new executives between the IPO and de-SPAC to avoid such a disposal being treated as taxable.

Verhoeven then described some Dutch tax aspects related to sponsors. A key question is whether the proceeds received by the sponsor are taxed as income from shares, or whether the proceeds are subject to the Dutch lucrative investment regime (LIR), under which income is taxed progressively up to 49.5 per cent. The LIR may apply if the proceeds are considered to be remuneration for employment services rendered for the SPAC in the Netherlands. This may also apply to non-resident sponsors, for example, board members in a Dutch SPAC. Some structuring alternatives are available to mitigate this risk.

Endreny then addressed the same questions from a United States perspective. In the US, it is also relevant whether the sponsors are considered to receive income in their capacity as investors or as managers. There is case law in the US to support them being investors.

De-SPAC structures


Delcia Capocasale Puga started this part of the session on de-SPAC structures by providing an overview of the different structures typically used. She emphasised that a simple merger of the target with the SPAC is the most straightforward alternative, but typically, it is only available when both entities are resident in the same jurisdiction.

On the other hand, a cross-border merger is typically not feasible due to a number of reasons, particularly corporate law reasons and the fact that such a merger takes too much time for a de-SPAC process. Also, from a tax perspective, a cross-border merger often leads to the permanent establishment (PE) of the receiving entity in the jurisdiction of the merging entity, which often does not work post-merger from a corporate perspective.


Capocasale briefly described the re-domiciliation alternative, and also touched on the re-domiciliation of the target entity from the Spanish tax perspective. Such re-domiciliation could lead to a PE in the target jurisdiction.

Regarding re-domiciliation, Francesco Gucciardo explained that the re-domiciliation of a SPAC into the target jurisdiction is sometimes necessary to enable an efficient de-SPAC transaction; for example, in Canada, it may enable a tax deferral for the Canadian sellers of the target in the de-SPAC phase. The re-domiciliation of SPACs, for example, from the Cayman Islands to Canada, is typically relatively easy.

There are, however, certain questions to consider. For example, sometimes planning is required regarding whether the non-participating shareholders of the SPAC can be redeemed before the re-domiciliation to Canada takes place, and if not, how the share redemption is taxed and how Canadian withholding taxes on deemed dividend distributions to non-resident shareholders can be avoided.

Gucciardo then explained a reverse triangular amalgamation, which may allow the redemption of non-participating shareholders without Canadian withholding taxes. In a reverse triangular amalgamation, a Canadian target (or New TopCo that has acquired a Canadian target) acquires the redomiciled SPAC via a triangular amalgamation (eg, merger sub and SPAC amalgamate, and shareholders receive the stock of the Canadian target/New TopCo ('TopCo')). TopCo issues ordinary shares to the participating SPAC shareholders, but issues redeemable preferred shares to the redeeming SPAC shareholders. Following the amalgamation, the redeemable preferred shares are redeemed.

Endreny then described certain US tax questions related to re-domiciliation. If a US SPAC seeks to acquire a non-US target, it may require the SPAC to re-domicile or become a subsidiary of a foreign corporation. In such a situation, inter alia, US 'anti-inversion rules' under Section 7874 must be navigated to ensure that the foreign parent is not treated as a US corporation (or subject to adverse rules). Additionally, an anti-inversion regime under Section 367 is also important for US shareholders.

Share-for-share exchange

Capocasale touched on the share-for-share exchange, which often seems like the most straightforward alternative. It should be noted that a tax neutral roll-over of the target shareholders to the SPAC level is not always possible. Tag along rights and how they function in practice should also be considered.

Christian Wimpissinger then explained that often it is key to keep the founders of the target as managers and shareholders after the de-SPAC. The tax neutrality (tax deferral) of the share-for-share exchange is often key to the founders. When the SPAC is outside the EU, a share-for-share exchange is not tax neutral for Austrian founders. A forward triangular amalgamation may help in this situation.

In a forward triangular amalgamation, the SPAC establishes a subsidiary in the target jurisdiction. Thereafter, the target merges with the SPAC's subsidiary. Merger consideration shares may be issued by the SPAC to the target shareholders; such a merger qualifies as tax neutral under Austrian law.

Wimpissinger then explained a reverse triangular amalgamation. In short, the only difference from a forward triangular amalgamation is that the merger goes the other way, that is, the subsidiary of the SPAC merges into the target. If both entities are Austrian, such a merger does not qualify as tax neutral, but it might work in other jurisdictions.

Other combination structures

Somerville explained that Irish companies as SPACs are often not feasible due to restrictive listing/takeover rules that require the suspension of trading on the announcement of the de-SPAC transaction. Rather, Irish entities may be used as the target or new TopCo HoldCo in de-SPAC structures.

Somerville then went through various structures used in practice, including those where an offshore SPAC (British Virgin Islands (BVI)/Cayman Islands) acquires an EU target using an Irish TopCo structure. He also listed some benefits for using Irish entities, which include:

  • common law legal system/investor familiarity/English speaking;
  • holding company regime and 12.5 per cent corporate tax (CT) rate;
  • straightforward equity/debt fundraising rules;
  • no 'say on pay' director compensation rules or employee participation board requirements;
  • access to EU directives and wide treaty network; and
  • proven track record of US-listed Irish TopCos: 35+.

Double dummy structure and exchangeable share structure

Capocasale then explained the double dummy structure, in which the final structure includes a listed holding entity that holds the shares in the target and SPAC as subsidiaries. This is achieved through two 'dummy' subsidiaries that are then merged with the target and SPAC. Capocasale also went through certain Spanish considerations regarding the double dummy structure.

Endreny stated that, in the US, a stock consideration may qualify as tax-free to US shareholders under Section 351, subject to the potential application of US anti-inversion rules. However, a double dummy structure is not tax free to US warrant holders, unless it qualifies as a tax-free reorganisation under Section 368.

Gucciardo then explained a nuance of Canadian corporate law, which relates to Canadian amalgamations. He went through a Canadian amalgamation structure, which results in a similar double dummy end structure.

Gucciardo also explained the exchangeable share structure from the Canadian perspective, which may be used to achieve a tax deferral for Canadian shareholders of a Canadian target if re-domiciliation is not possible.

Interesting practice points​​​​​​​

As a final note, Anderson went through interesting practice points, including the use of treasury shares (desirable from the capital markets perspective for use in the de-SPAC and post-de-SPAC stages), private placement warrants and stamp duty structuring alternatives for UK targets.

Finally, Endreny described an UP-C structure, which has been used in the case in which the target is a flow-through (transparent) entity and other structures (eg, double dummy) present inefficiencies. In an UP-C structure:

  • the SPAC remains a public vehicle and invests in the equity of the target;
  • target equity holders may sell some equity to the SPAC for cash;
  • target equity holders are able to maintain equity ownership in the transparent entity, and when they desire liquidity in the future, they may exchange their equity for PubCo shares; and
  • structure often includes a tax receivable agreement.

Endreny then closed the session.