Rationalising legal entities and moving operations

Transcription

1 Rationalising legal entities and moving operations Isabella Roberts Ania Rontaler Hatice Ismail 25 January 2017

2 Introduction Rationalising legal entities Moving operations From a corporate and tax perspective

3 Why reorganise? In preparation for an acquisition / sale Following an acquisition To increase business efficiencies To increase tax efficiencies.. Brexit EU banks/other regulated entities passporting into the UK will likely need to separate out UK business into a UK entity UK and other banks/other regulated entities using their FCA/PRA regulated status to passport into the EU from UK headquarters will need to set up an entity registered in an EU-27 state, and transfer into it the relevant business

4 Planning a reorganisation Aim of the reorganisation Complexity of business and desirability of achieving a transfer by way of universal succession Regulatory process Tax Employment implications Costs, complexity and timing of process Ascertain ownership of assets Consider ongoing requirements for shared assets/services

5 Tax considerations Tax consequences of any particular reorganisation will depend on the form it takes, the types of assets and the location of the entities/assets involved Tax position of a number of different entities may need to be considered: The transferor of the assets or shares (taxes on gain on disposal, VAT etc) The transferee of the assets or shares (base cost, transfer taxes etc) Tax treatment of any outsourced supplies (transfer pricing, VAT etc) Any shareholders involved (especially where demergers involved) Any employees / others relocating to different jurisdictions (employment taxes, social security taxes and benefits) Tax treatment under UK rules can be highly dependent on the specific fact pattern

6 Options: Business Transfer Can be used to transfer all or part of a business in any jurisdiction or jurisdictions Business Transfer Agreement (BTA) (plus local law contracts?) Due diligence Perfection of transfer of individual assets and liabilities, and contracts/rights: specific formalities e.g. transfer of land in writing, assignments of leases requiring landlord consent

7 Options: Business Transfer (cont.) Perfection of transfer of individual assets and liabilities, and contracts/rights: contract transfers consent needed? benefit vs burden novation / novation by conduct timing / number of counterparties customers likely to withhold consent or renegotiate? Employees in Europe, automatically transfer with the business (UK TUPE)

8 Business transfer structure Seller(s) (any jurisdiction) BTA (and transfer documents) Transfer of contracts and assets Buyer(s) (any jurisdiction)

9 Tax: intra-group transfer of a UK trade (1) Transfers of capital items within a CGT group will be on a no gain/no loss basis (TCGA 1992 s.171), but degrouping charges if transferee leaves the group within six years CGT group will encompass UK companies and UK PEs of non-uk companies provided the 75% share ownership and 51% economic ownership tests are met Similar treatment for post-2002 IP and intangible assets Intra-group transfers of debt and derivative contracts made on a tax neutral basis, subject to possible degrouping charges Where a trade is transferred but remains in the same ultimate ownership: Capital allowances may be transferred at their tax written down value Trading losses may continue to be set against the same trade Stock may be elected to be transferred at the greater of cost and the sale price

10 Tax: intra-group transfer of a UK trade (2) VAT: transfer of a business or part should generally be outside the scope of UK VAT as a TOGC UK land/buildings: SDLT group relief will be available provided 75% common ownership test is met (otherwise SDLT at rates up to 5% for commercial property), but clawback if the transferee leaves the group within three years Shares: group relief for shares transferred within 75% group (otherwise stamp duty at 0.5%)

11 Business transfers pros and cons Pros: - only the assets and liabilities selected will transfer (unlike share sale) - private process (in most jurisdictions) - can (but does not have to) involve more than one jurisdiction Cons: no universal succession each asset needs to be dealt with separately

12 Options: Cross-border merger Can be used to merger two or more entities incorporated in different EEA States NB EasyNet case shells/dormant entities Assets / liabilities / contracts etc transfer by operation of law due diligence post-transaction notifications and updating of public registers permits do not transfer Any non-transferring assets must first be removed Employees automatically transfer

13 Options: Cross-border merger (cont.) Court/notarial process with set timelines and formalities merger plan and explanatory statement display of documents employee consultations shareholder approval court/notarial final approval transferor entity struck-off automatically NB branch transfers require new branches to be set up (transferee entity)

14 Options: Cross-border merger key stages First court hearing Merger Plan and Merger Report sent to employees and shareholders 2 months - Merger Plan and Merger Report available for inspection 1 month - Shareholder resolutions Second court hearing Issue of pre-merger certificates 6 month window from pre-merger certificates final approval 7 days striking off

15 Cross border merger structure Before Transferor (disappearing entity) Transferee After Transferee (surviving entity) Holding transferee and transferor businesses

16 Tax considerations on cross border merger Need to minimise taxes on the assets being transferred from the Transferor to the Transferee Is the transfer within the intra-group rules discussed? Other tax considerations: stamp taxes (stamp duty/sdlt) on the transfer of any shares in UK subsidiaries or UK land Trading losses Capital allowances VAT

17 Tax on transfer of operations between EU member states Rules implementing the EU Mergers Directive are intended to provide relief or deferral of tax on gains made on the transfer of trades/businesses between entities in different Member States This includes where: the whole or part of a UK trade or business is transferred between companies resident in different EU Member States OR a UK resident company transfers the whole or part of a non-uk trade or business carried on through a PE to a company resident in another EU Member State This could be in the context of a branch incorporation (where assets are transferred to a company in the same jurisdiction as the branch) In either case, the relief requires that the transfer is wholly in consideration of the issue of shares or securities in the transferee company Need transfer to be for bona fide commercial reasons not to avoid tax can obtain HMRC clearance

18 Tax: incorporation/transfer of a UK trade/business Where reorganisation involves the transfer of the UK trade/business of a company in one Member State (MS) to a transferee in another MS, then no gain/no loss disposal if the transfer is made wholly in exchange for shares/securities of the transferee company and the transferee remains in the charge to UK corporation tax in respect of the assets transferred (i.e. the transferee is a non-uk company with a UK PE/branch or is a UK company) Where reorganisation involves the transfer of the UK trade from a non-uk company, need to consider tax in the jurisdiction of that company Where the transferor company is in the EU, then currently the provisions of the Mergers Directive may provide for deferral in that EU Member State (MS) of any tax on accrued gains where business is transferred in return for an issue of shares Post Brexit, UK will not be a MS and so Mergers Directive will not in principle apply to the transfer of a UK trade or business

19 Tax: incorporation/transfer of a non-uk trade (1) Transfers/reorganisations with an international element need to be considered from the perspective of tax in both jurisdictions Reorganisations involving EU PE currently benefit from provisions of the Mergers Directive which provide for relief from taxes on accrued gains Provisions of the Mergers Directive (as incorporated into UK law) provide for a tax credit for the tax that would have been payable in the EU MS where the PE is located, but for relief under the Mergers Directive in that MS Query future of these provisions post-brexit Also consider: Branch exemption rules General branch incorporation relief

20 Tax: incorporation/transfer of a non-uk trade (2) Where UK company has made an election for its non-uk PE profits to be exempt (CTA 2009 s.18a) then no UK CGT when branch trade transferred to an overseas company Alternatively, a more general branch incorporation relief (TCGA 1992 s.140) provides for deferral of tax on accrued gains where: a UK transferor company transfers the whole or part of a non-uk trade (together with all of the assets used for the purposes of the trade or part) to a non-uk transferee the transfer is wholly or partly in exchange for shares issued by the transferee to the transferor, and as a result the transferor owns at least 25% of the ordinary share capital of the transferee company Gain is deferred until either deferring the gain until either the transferee company disposes of any of the transferred assets (within six years of the transfer) or the transferor company disposes (at any time) of any of the shares issued by the transferee company Similar relief for intangible fixed assets (CTA 2009 s.827)

21 Tax: incorporation/transfer of a non-uk trade (3) Also need to consider: Local transfer taxes Accrued losses/tax depreciation Trading stock VAT

22 Cross border mergers pros and cons Pros: - universal succession - certain process Cons: - at least two (real) EU member state entities required - court / notarial process complicated, public - doesn t work to transfer contractual rights and obligations in all cases

23 Options: Demerger Results in the transfer of part of a business from one entity into a parent or sister entity Will require the individual transfer of assets and liabilities (as for a business transfer) No specific statutory procedure under English law various demerger structures have been formulated using general procedures under Companies Act 2006 including: dividend in specie of business to be demerged (simplest) insertion of new holding company and transfer of shares by scheme of arrangement transfer of shares in demerged company under court approved reduction of capital s.110 liquidation scheme

24 S.110 liquidation scheme Transferring company is liquidated; and business transferred to transferee Requires perfection of the transfer of each asset/contract (as for a business transfer) Specific process with timelines and formalities including the appointment of a liquidator

25 S.110 structure Business Present Entity is liquidated

26 Tax: demergers (1) Need to avoid shareholders being treated as receiving a taxable distribution and making a taxable disposal of shares Tax reliefs available where qualifies as a scheme of reconstruction Shareholders receiving shares in the demerger not treated as having disposed of the original shares and existing base cost attributed to new shares Scheme of reconstruction requires: Issue of shares by company(ies) to the all the holders of shares in the demerging entity on an equal basis Effect of the restructuring is that the business carried on by the demerging entity is now carried on by the new company(ies)

27 Tax: demergers (2) For transferor company, capital assets transfer from distributing company to the transferee on a no gain/no loss basis provided the assets remain within the charge to UK tax Tax reliefs dependent on reconstruction being effected for bona fide commercial reasons and not for avoidance of tax HMRC clearance procedure available Intangible assets, loan relationships/derivatives can also transfer from distributing company to the transferee on tax neutral basis For transferee company, narrower relief from stamp duty/sdlt for transferee of assets for scheme of reconstruction requiring substantial identity of ownership

28 Demergers pros and cons Pros: - can work well for an entity with distributable reserves - can realise value in certain cases Cons: - can be complicated (from a legal, tax and accounting perspective) - not commonly used

29 Other options? Strike off (three months of non-trading) / voluntary liquidation Combining steps Domestic merger of European entities (most civil law jurisdictions permit these) Corporate migration

30 Tax: corporate migration When a company ceases to be tax resident in the UK and becomes resident in another country, exit charges may arises in relation to accrued gains, trading stock etc May elect to postpone charge where immediately after it ceases to be UK resident, the exiting company is a 75% subsidiary of a UK resident company Deferred payment arrangements possible where company moves its tax residence to another EEA state Also exit charges where a non-uk company that carries on a trade in the UK through a UK PE ceases to carry on that trade (subject to deferral) Where a company wishes to locate its UK business abroad, branch incorporation relief may provide a more tax efficient method of achieving this than corporate migration since if the assets are first transferred to an overseas branch the branch can potentially be incorporated free of corporation tax in the UK (and avoiding potential exit charges)

31 QUESTIONS

32 Brexit Transition Toolkit COMING SOON! Practical guidance to streamline establishment of a new EU entity We are at an advanced stage working with clients and industry associations to formulate our Brexit Transition Toolkit Comprehensive and practical guidance for management across different parts of your business to help get your organisation established quickly Available to all clients on a fixed cost basis Hosted online for 24/7 access via elexica.com Enquiries: Charlotte Stalin, Partner charlotte.stalin@simmons-simmons.com FT Innovative Lawyer of the Year 2016

33 Your speakers ISABELLA ROBERTS Partner Corporate, London ANIA RONTALER Partner Corporate, London HATICE ISMAIL Partner Tax, London

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