Capital reduction demergers
Produced in partnership with Zoe Feller of Bird & Bird

The following Tax practice note produced in partnership with Zoe Feller of Bird & Bird provides comprehensive and up to date legal information covering:

  • Capital reduction demergers
  • When is a capital reduction demerger appropriate?
  • Which tax clearances are needed?
  • Steps in a capital reduction demerger
  • Step one—insert a new holding company
  • Tax implications
  • Step two—transfer the demerged subsidiary to the new holding company
  • Tax implications
  • Step three—capital reduction of the new holding company
  • Tax implications for the shareholders—income
  • More...

Capital reduction demergers

The reasons why a company might carry out a demerger, and the different ways in which a demerger may be structured, are described in Practice Notes: Demergers—an introduction to the tax issues and Demergers—an introduction for corporate lawyers.

More detailed Practice Notes describe the tax issues associated with the main demerger routes, namely:

  1. statutory (or dividend) demergers, which may be direct or indirect—see Practice Note: Statutory demergers

  2. liquidation demergers—see Practice Note: Liquidation demergers, and

  3. capital reduction demergers—which are the subject of this Practice Note

A capital reduction demerger involves the top company of the target group reducing its capital, in consideration for which the demerged business is transferred to a new holding company that in turn issues shares to the shareholders.

Unlike a statutory demerger, a capital reduction demerger does not qualify for the tax reliefs that are specifically available for exempt distributions. It may, nonetheless, be carried out in such a way that it does not trigger tax charges, either on income or capital, for the shareholders or any of the companies involved in the demerger. This relies on ensuring that the demerger qualifies as a reconstruction for capital gains purposes, and that it can properly be regarded as a repayment of capital rather than an income distribution. In many cases it will also be possible to rely on statutory reliefs from stamp taxes,

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