Cross-border acquisitions

Produced by Tolley in association with Anne Fairpo

The following Corporation Tax guidance note Produced by Tolley in association with Anne Fairpo provides comprehensive and up to date tax information covering:

  • Cross-border acquisitions
  • Introduction
  • Structure
  • Subsidiary
  • Branch
  • Sub-holding company in target country
  • Sub-holding company in a third country
  • Funding
  • Debt v equity
  • Interest deduction
  • More...

Cross-border acquisitions

Introduction

This guidance note outlines the three main tax considerations when a UK company makes an acquisition outside the UK, which are:

  1. structure, ie whether to establish a new subsidiary to make the acquisition

  2. finance, ie whether to fund the new subsidiary with debt or equity

  3. whether to acquire assets or shares in the target business

The same considerations will apply when a foreign company makes an acquisition of a UK business.

Structure

There are a number of different structures which a company can use to acquire a target business in another country. These structures are similar to those which are used when setting up a new business in another country.

See the Introduction to setting up overseas ― companies and Setting up overseas ― branch or subsidiary guidance notes.

Subsidiary

This structure will exist if:

  1. the acquiring company buys shares in the target company

  2. the acquiring company establishes a new subsidiary to acquire assets of the target business

Diagram 1 ― subsidiary ― share acquisition:

Diagram 2 ― subsidiary ― assets acquired:

If a new subsidiary is established, this can be funded with debt or equity (see below).

A subsidiary can be tax efficient if the rate of tax in the subsidiary is lower than the rate of tax in the acquiring company. The profits of the target business will be subject to tax in the subsidiary in the first instance. Subject to the controlled foreign company rules, the profits of the subsidiary may never be subject to tax in the acquiring company if dividends paid to the acquiring company are exempt from tax.

See the Distributions and Controlled foreign companies (CFCs) guidance notes.

Branch

This structure will exist if the acquiring company buys assets of the target business and a permanent establishment is created as a result.

Diagram 3 ― branch:

The profits of the branch may be taxed in both the target jurisdiction and the acquiring company. If the acquiring company were a UK company, the profits of an overseas branch may be exempt from UK

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