Transcript Slide 1

FROM PRINCIPLES TO PLANNING
FROM PRINCIPLES TO PLANNING
International Corporate Acquisitions
and Reorganizations
International Corporate Acquisitions and
Reorganizations
Roy Deaver, Moss Adams LLP
Tim Bloos, MNP LLP
Scott Sneckenberger, Plante Moran LLP
Structuring Foreign Acquisitions and
Reorganizations by U.S. Companies
Roy Deaver, Moss Adams LLP
U.S. Foreign Acquisitions and Reorganizations
Tax Structuring
• Tax Structuring is defined as a form into which business or financial
activities may be organized to minimize taxation, while achieving
the business goals of a company.
• An important part of tax structuring is deciding how to set up a
business before commencing operations. A business may run as a
sole proprietorship, general partnership, limited
partnership, corporation or limited company
U.S. Foreign Acquisitions and Reorganizations
Issues Underlying Tax Structuring
• Tax Residency
• Permanent Establishment
• Transfer Pricing
• Substance
• Business Purpose
• Due Diligence
• Anti Avoidance/Abuse/Tax Risk Management
• Treaty Shopping/WHT issues
U.S. Foreign Acquisitions and Reorganizations
Cross border Transaction Imperatives
Business
Environment
Cultural Issues
Business Dynamics
Accounting
treatment
Cross Border
Transactions
Legal & regulatory
framework
Tax regimes & treaties
Identifying and
delivering synergies
U.S. Foreign Acquisitions and Reorganizations
Key Tax and Financial Considerations
2
Entry Strategy
1
3
Income flows and
their taxability
6
Financing options
Cross border
transactions
Exit considerations
4
Debt Structuring
Cash repatriation
U.S. Foreign Acquisitions and Reorganizations
The Five Questions of Tax Structuring
• What should you acquire (assets or shares)?
• How should you acquire it (holding company issues)?
• How will you pay for it (tax efficient funding)?
• How will you use profits (maximizing dividend flows)?
• What if things don’t work out (tax efficient exit)?
U.S. Foreign Acquisitions and Reorganizations
What should you acquire?
• Stock purchase
• Asset Purchase
• Merger, Demerger, etc
U.S. Foreign Acquisitions and Reorganizations
Stock vs. Assets
• Asset Purchase
• Non-tax considerations
• Successor liability?
• Contract implications (e.g., assignability of commercial and labor contracts?)
• Local considerations
• Basis step-up and amortization?
• Carryover of tax attributes unlikely
• Indirect taxes (transfer, stamp, VAT, etc.)
• Administrative considerations (e.g., registrations, licenses, etc.)
• US considerations
• Clean slate - - no E&P, tax pools, etc.
• Basis step-up / amortization of intangibles and goodwill for purposes of
calculating E&P
U.S. Foreign Acquisitions and Reorganizations
Stock vs. Assets (cont’d)
• Stock Purchase
• Non-tax considerations
• Successor liability? Indemnification?
• Contract implications (e.g., assignability of commercial and labor contracts?
•Local considerations
•Potential carryover of tax attributes?
•Administrative (e.g., registrations, licenses, etc.)
• US considerations
•Carryover of attributes (E&P, etc.)
•Elective treatment as an asset acquisition under section 338(g)
•Purge historic E&P
•Basis step-up / amortization of intangibles and goodwill for purposes of
calculating E&P (but consider section 901(m) and impact on FTC calculation)
U.S. Foreign Acquisitions and Reorganizations
How should you acquire it ?
• How should you acquire it ?...
• SPV Options
• Company
• Branch / Liaison office
• Trust
• LLPs
• Applicable Tax Laws
• Host Country
• Target Country
• SPV Jurisdiction
• Tax Treaties
U.S. Foreign Acquisitions and Reorganizations
Acquisition Structure
Parent Company
Parent Company
Holding Company
Holding Company
Acquirer
Acquisition Co.
Target Company
Target Company
Share
Purchase
• Acquirer sets up Acquisition Company in Target Country
• Acquisition Company purchases Assets/Business of Target Company for cash consideration
U.S. Foreign Acquisitions and Reorganizations
Need for an Overseas Holding Company (OHC)
•
•
•
•
Taxation of foreign dividends by target’s host country
Retention of profits in offshore jurisdiction
Deferral of tax
Greater flexibility for inter-company transfer of funds and for
setting up operations in other overseas jurisdictions
• Future restructuring easy
• Better tax regime within European Union
U.S. Foreign Acquisitions and Reorganizations
Investor Considerations re: OHCs
• Receive dividends and capital gains tax free
‒ Participation Exemption corporate taxes, capital gains
• Tax efficient repatriation of profits/Reduced Withholding of Profits
• Controlled Foreign Company (CFC) legislation
• Finance companies mechanism
U.S. Foreign Acquisitions and Reorganizations
Investor Considerations re: OHCs (cont’d)
• Flexible reorganizations
• Reliable tax authorities - Rulings
• Non-tax driven considerations (e.g. IPO, exchange control regulations,
protection IPR)
U.S. Foreign Acquisitions and Reorganizations
Acquisition Considerations
• Capital Gains
•
•
•
•
•
•
•
•
•
Local taxes and underlying credit of foreign taxes
Withholding Taxes – Interest, Dividends and Royalties
Controlled Foreign Corporation Rules
Debt Vs Equity
Thin Capitalization Norms
Ability to push up / down debt cost
Valuation of intangibles
Accounting (Consolidation)
Stamp Duties
U.S. Foreign Acquisitions and Reorganizations
How to Minimize Tax on Profits?
• Direct Tax
• Tax Incentives
• Utilization of tax losses brought forward
• Group Relief
• Operating arrangements – Revenue vs. Capital
• Interest - Double dip
• Treaty Planning
U.S. Foreign Acquisitions and Reorganizations
How to Minimize Tax on Profits? (cont’d)
•
Indirect taxes/Stamp Duty
•
Integration
• Indirect Taxes/Tax arbitrage from VAT via export and import
• Transfer Pricing
U.S. Foreign Acquisitions and Reorganizations
Income Stream and Their Taxability
Income streams
Dividends
Capital Gains
Interest
Other royalty / brand fees /technical
Services / management services
Principles for evaluation
• Interest, TS and royalty can flow
independent of ownership pattern
• TS and royalty would typically flow to an
operating entity, which possess technical
capabilities
• Principal drivers are tax costs associated with
dividend flows and gains on disposal of shares
• Brand fee would flow to the IPR company
Key elements – arm’s length principle, documentation, overall tax costs and foreign tax credits
U.S. Foreign Acquisitions and Reorganizations
Exit Strategies: Anticipating the End
• Use of Multi layered Structure
• Capital Gains in Tax Free Jurisdiction
• Sale of Foreign Assets
• Merger / Winding Up
• Taking advantage of Tax Incentives / Exemptions
U.S. Foreign Acquisitions and Reorganizations
Restructuring Transactions
• Internal transactions - potentially broad application to entity
rationalization, post-deal integration, etc.
• Expiration of “look through” under Section 954(c)(6)
• Legislative efforts to modify/eliminate the boot within gain
rule under section 356(a)(2)
• Impact on cross-chain sales and “cash D reorg’s”
U.S. Foreign Acquisitions and Reorganizations
Restructuring Transactions (cont’d)
• Cross chain sales under section 304
• If applicable, proceeds treated as a distribution in redemption of the stock of
the corporation acquiring such stock
• Dividend to the extent of the E&P of acquiring and target (irrespective of gain)
• Subpart F implications (with the expiration of section 954(c)(6))
• Cash D reorganizations (section 368(a)(1)(D))
• Typically “sell and check” transactions
• Treatment of boot • Boot within gain rule under section 356(a)(2)
• Gain re-characterized as a Dividend to the extent of E&P of target and
acquiring
• Subpart F implications (with the expiration of section 954(c)(6))
U.S. Foreign Acquisitions and Reorganizations
Restructuring Transactions (cont’d)
• Potential withholding tax implications
• Dividend deemed out of US E&P subject to tax under sections 881
and 1442 (see , for example, Rev. Rul. 92-85)
FP
US
FS2 shares
FS2
$$$
FS1
FS2
U.S. Foreign Acquisitions and Reorganizations
Restructuring Transactions (cont’d)
• Other considerations
• Section 367
• Outbound transfers
• Gain Recognition Agreements
• Section 7874
• Inversion transactions
Structuring U.S. Acquisitions and Reorganizations
of Canadian Companies
Tim Bloos, MNP LLP
Canadian Acquisitions and Reorganizations
Corporate merger and acquisition transactions in relation to
Canadian businesses:
•
•
•
•
•
Share Purchase
Asset Purchase
Hybrid Purchase
Merger or Amalgamation
Court Ordered Plan of Arrangement (complex transactions)
Canadian Acquisitions and Reorganizations
Shares vs. Assets
• Share Purchase
• Avoid potential liabilities associated with assets
• Can transfer tax assets such as losses
• Avoids shareholder tax on distribution of proceeds from sale of assets
• Capital gain realized for vendor, taxed at 50% of normal rates
• Limited ability to “bump up” underlying value of assets
• Asset Purchase
• Increase the depreciable base of the underlying assets including goodwill
• Allows acquisition of only portion of desired assets and not entire business
• Avoid historical and potential liabilities associated with the business
• Acquisition of control rules do not apply
• Ability to writeoff purchase price of assets (through depreciation)
Canadian Acquisitions and Reorganizations
Share Purchase Transaction
• Target Shareholders
• Rollover provisions not available when foreign shares taken back
(except if use exchangeable shares)
• Use of Canadian Subsidiary
• To facilitate interest deduction on financing acquisition (subject to
thin cap),
• To allow repatriation of capital and accommodate a step up in basis of
assets
• Upon acquisition, amalgamate subsidiary into target to match interest
expense with Canadian source income
Canadian Acquisitions and Reorganizations
Share Purchase Transaction: Acquisition of Control
•
•
•
•
•
•
•
•
•
Deemed year end
Certain compliance requirements
Shortened loss carry forward and back periods
Pro-ration of certain deductions such as depreciation etc.
Acceleration of income inclusions
New tax year may be selected
Realization of accrued losses on certain assets
Expiry and streaming of losses for same or similar business
Successor rules for resource expenses
Also, may be able to elect to step up the ACB of depreciable and nondepreciable property
Canadian Acquisitions and Reorganizations
Share Purchase Transaction: Bump Planning
= Increase tax cost of certain eligible property owned by the Target
• Must be an acquisition of control of the Target
• Acquiring investor must acquire 100% of shares of Target
• Bump is effected through winding up or amalgamation of Target into
Acquirer
• Complex conditions to qualify for the bump
• Tax Cost of eligible assets could be increased to as much as FMV
• Allows subsequent disposition of asset to third party at no tax cost
• A target foreign subsidiary of Canada could be transferred to another
foreign holding company outside of Canada at no Canadian tax cost
Canadian Acquisitions and Reorganizations
Asset Purchase Transaction: When?
• Acquirer may choose to purchase all or some of assets of Target
• Both target and its shareholders may have to pay tax on sale of assets if
proceeds are distributed to shareholders
• Acquirer will have a “bumped up” FMV ACB in assets and therefore may be
willing to pay more for an asset purchase
• If the Target is a CCPC, and significant value in the business is attributable to
goodwill, the overall tax paid on sale of assets may not be significantly different
than overall tax paid on sale of shares (low tax rate, capital dividend)
Canadian Acquisitions and Reorganizations
Asset Purchase Transaction: Returning Proceeds to Foreign Investor
• Return of capital (free of tax) but reduce ACB
• Distribution by a public corp would be a deemed dividend unless funds arise
from sale of assets out of ordinary course of business (sale of assets of a division
or branch)
• Capital dividend (free of tax, but only available to Canadian resident shareholder)
• Taxable dividend
• Loan or advance of funds
Canadian Acquisitions and Reorganizations
Asset Purchase Transaction: Other Issues
Allocation of Purchase Price
• Balance Target’s tax costs associated with purchase price allocation with
Acquirer’s tax benefit in higher tax cost base
• Allocation preferences will depend on composition of assets purchased
Sales Tax
• Election available so that no GST applicable if sale is all or substantially all of the
assets necessary to operate the business
• Acquirer may be liable for vendor’s unpaid sales tax liability unless a clearance
certificate is obtained
Canadian Acquisitions and Reorganizations
Hybrid Purchase Transaction:
Accessing Capital Gains Exemption (CGE) on QSBC Shares
• US investor may be motivated to structure investment as a partial share and a
partial asset purchase in order to give a qualifying Canadian vendor access to
$750,000 CGE on sale of shares ($180,000 cash tax saving) …. which could
translate into a better purchase price to the U.S. investor
• Vendor sets up new Canadian subsidiary (Newco)
• Roll $750,000 worth of assets (say A/R) into Newco in exchange for PS
• Investor purchases shares of Newco and remaining assets of Vendor
Canadian Acquisitions and Reorganizations
Mergers or Amalgamations: Section 87
• Legal form depends on which corporate statute (federal/provincial) the entities
are incorporated under and what the terms are under the Amalgamation
Agreement (merger, triangular amalgamation)
• A tax-deferred rollover for shareholders of predecessor corporations and
continuity of tax accounts available if conditions of section 87 met
• Merger of two Taxable Canadian Corps to form one corporation (Amalco)
• All of property of predecessors becomes property of Amalco
• All of shares of predecessors exchanged for shares of Amalco
• Predecessors could also receive shares of a TCC that controls Amalco
instead of shares of Amalco (triangular amalgamation)
• PUC of Amalco must be no greater than combined PUC of predecessors,
otherwise will be reduced under the Act
Canadian Acquisitions and Reorganizations
Mergers or Amalgamations: Section 87 (cont’d)
• Section can still be used even if there is partial cash paid as consideration for
the acquisition of Target shares (use of redeemable PS of Amalco)
• Since condition of the section to apply is that no consideration except
shares of Amalco are received by predecessors, then other security holders
(debtors) could also receive rollover treatment
• Effect of the rollover
• No disposition of underlying assets as Amalco is continuation of predecessors
• Cost bases of underlying assets transfer to Amalco (not deemed disposed)
• Where amalgamation results in a change in control of one of the predecessor
corporations then losses etc. of the predecessor subject to change of control rules
• Deemed taxation year end for predecessor corporations
Canadian Acquisitions and Reorganizations
Disposition of Taxable Canadian Property (TCP)
• Disposition of TCP for a gain results in non-resident incurring Canadian tax
unless there is a treaty exemption
• Non-resident Vendor must provide purchaser with a section 116 clearance
certificate issued by CRA which is granted when appropriate arrangements are
made for payment of tax liability, otherwise, acquirer must withhold and remit
25% of purchase price to CRA
• Not subject to section 116 requirements
• Shares that are treaty protected property under Canada-US treaty
• Shares listed on a designated stock exchange
• Private company shares or partnership or trust units unless hold predominantly
Canadian real property
Canadian Acquisitions and Reorganizations
Foreign Affiliate Dumping Provisions
• Introduced in Aug 2012, amended in October 2012 for transactions
after March 2012
• Applies to Canadian resident corp. (CRIC) controlled by a non-res corp.
(US Parent) that invests in a foreign affiliate (subject corp.)
Traditional debt
dumping
Foreign-owned Canco acquires shares of FA, creating
additional debt in Canada with potential tax fee dividends
(active business)
Effect of Rule
Deem dividend to be paid by CRIC to Parent to extent of nonshare consideration and PUC reduction (withholding tax)
Financing U.S. Operations of Canadian MNCs
Foreign Affiliate Dumping Provisions (cont’d)
‒ Rules apply beyond traditional debt dumping:
1. Transactions constituting an
“Investment”...
‒ acquire shares
‒ contribute capital
2
‒ indebtedness*
‒ options
‒ extension of maturity,
redemptions, acquisition or
cancellations date on debt/shares
‒ acquisition of CDN target where
>75% of FMV is in FA shares of
target
2. By a CRIC...
3. In a subject corporation...
US
(Parent)
1
Canco
(CRIC)
US
Co
FA
(SC)
FA
(SC)
3
…in a subject population
Financing U.S. Operations of Canadian MNCs
Foreign Affiliate Dumping Provisions (cont’d)
‒
Where rules do not apply (exceptions):
1. Loans qualifying as PLOI (pertinent loan/indebtedness)
‒ CRIC and Parent jointly elect on loan owing to CRIC
‒ Imputed interest applies instead of deemed dividend
2. Closely connected test
‒ Business activities of FA are closely connected to CRIC
3. Certain corporate reorganizations
4. Indirect funding test
‒ 3 conditions to meet
5. PUC Redirection
‒ Deemed dividend reduced by PUC of CRIC or through a Dividend Substitution
Rule.
Note: PUC can also be reinstated for purposes of the rule under certain circumstances
Structuring U.S. Acquisitions and
Reorganizations of Mexican Companies
Scott Sneckenberger
Plante Moran PLLC
Praxity International Tax Update
Atlanta, Georgia
May 2013
Mexican Acquisitions and Reorganizations
Methods of acquiring companies in Mexico:
• Merger
• Sale of shares
• Sale of assets
Mexican Acquisitions and Reorganizations
Mergers: Tax Aspects
• Surviving entity must file a notice with the tax authorities within
•
•
•
•
one month of closing of the transaction.
In order for the transaction to be non-taxable, the combined
company must continue with the activities performed before the
merger for at least one year after the merger.
Tax losses generally cannot be transferred as a consequence of a
merger.
Profit Net Account (CUFIN) and the Capital Contributions Account
(CUCA) can be combined.
Beware capital increase / decrease transaction structures! These
are also taxable events.
Mexican Acquisitions and Reorganizations
Sale of Shares
• When a transfer of Mexican shares occurs, the result is
generally a taxable transaction, taxed as follows:
 Default – Taxed at 25% of the gross transaction without
any deductions.
 Option (by “election”) - Applying a 30% tax to the net
gain. Certain requirements must be met.
 In both cases, tax is due via a Mexican tax filing within 15
days following the closing of the transaction – Not much
time to get the transaction details ironed out and
reported. Plan ahead - before closing!!!
Mexican Acquisitions and Reorganizations
Sale of Assets
• Important issues to consider related to Mexican asset sales:
 Fixed assets- An appraisal is recommended to support the
allocation of sales price. Note that any gains are taxed at 30%!
 Inventory- Important to ensure the customs status and proper
documentation / handling of the inventory – especially for
IMMEX operations.
 Intangibles – Who owns the IP? Sale may result in withholding
taxes on things like royalties, know how, trademarks, etc.
 Goodwill is not a great option – non-deductible in Mexico.
 Diligence should not be reduced or eliminated in asset sales!
Mexican Acquisitions and Reorganizations
When do tax attributes carry-over ?????
Tax liabilities
Merger
Sale of Shares
Sale of Assets
a
a
??
Tax losses (may be limited)
a
CUFIN and CUCA
a
a
Labor liability
a
a
Labor substitution (Social
Security)
a
a
VAT
Mexican Acquisitions and Reorganizations
Reorganizations
•
Reasons for a Reorganization or Spin off:
 Expanding business
 Decentralization – note that employee spin-off
transfers are generally no longer valid (due to the new
labor law).
 Diversification
 Segmentation
 Business solutions structures
Mexican Acquisitions and Reorganizations
Spin off: Legal Aspects
• For a spin off to be legally recognized, board meeting minutes
•
describing the transaction must be prepared and signed by a
Mexican Public Notary. Notice must then be filed at the Public
Registry of Commerce.
The divested operations must be housed in a newly-created
Mexican entity. This requires that the new Mexican entity have
all documentation required for a new legal entity.
Mexican Acquisitions and Reorganizations
Spin off: Tax Aspects
• Both the surviving and newly-created entities are considered to have
irregular tax years in the year of spinoff.
• The shareholders of 51% of both the surviving and newly-created
entities must be the same for the year prior to and 3 years after the
spin-off. Otherwise the transaction is considered taxable.
• Companies must file a notice with the tax authorities within one
month of the closing of the transaction.
• The shareholders of 51% of the shares of the spin off company and
the split companies will be the same in the next 3 years following the
spin off including the prior year.
Mexican Acquisitions and Reorganizations
Spin off: Tax Aspects
• Tax losses can be transferred in the same proportion in which
the inventory and accounts receivable are split.
• Earnings and profits (CUFIN) can be allocated in the same
proportion mentioned above.
• Capital account (CUCA) can be allocated in the same
proportion mentioned above.
Mexican Acquisitions and Reorganizations
Things to remember:
• Risks related to equity transactions – any skeletons in the
closet are “assumed” by the buyer.
• Certain risks carry over even in asset sales.
Diligence is still
important in asset transactions.
• Complete thorough due diligence prior to closing – if you don’t
know about the problem, you cannot correct it.
• Beware goodwill in asset sales – non-deductible in Mexico.
• If the tax result sounds too good, it probably is. Make sure the
structure is supportable.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we
inform you that any U.S. federal tax advice contained in this
communication (including any attachments) is not intended or
written to be used, and cannot be used, for the purpose of (i)
avoiding penalties under the Internal Revenue Code or (ii)
promoting, marketing, or recommending to another party any
transaction or matter addressed herein.
Questions?
Contact Information
Roy Deaver, Moss Adams LLP
[email protected]
Tim Bloos, MNP LLP
[email protected]
Scott Sneckenberger, Plante Moran LLP
[email protected]