Report on a session at the 14th Annual IBA Finance & Capital Markets Tax Conference held in London on 21 January 2025

Session Chair

Francesco Gucciardo, Aird & Berlis, Toronto

Panelists

Devon M Bodoh, Weil Gotshal & Manges, Washington, DC
Reto Heuberger, Homburger, Zürich
Mike Lane, Slaughter and May, London
Elissa Romanin, MinterEllison, Melbourne
Matthias Scheifele, Hengeler Mueller, Munich
Clemens Philipp Schindler, Schindler Rechtsanwälte, Vienna

Reporter

Damian Snop, A&O Shearman, Frankfurt

Introduction

The panel discussed different cross-border restructuring case studies, both from the inbound and outbound perspective, in terms of the jurisdictions represented by the panel members. A particular focus of the panel was on cross-border mergers, flip transactions and continuations. Further, the panel provided technical background on the United States inversion rules. Given the recent announcement by the Trump administration regarding the Organisation for Economic Co-operation and Development’s (OECD) Pillar Two framework, the panel discussed the US position and potential retaliatory measures.

The rationale behind cross-border restructuring

Francesco Gucciardo opened the panel by outlining that the rationale behind restructuring in another jurisdiction is often not driven by legal aspects, but rather by commercial and financing considerations. These motivations mainly concern access to deeper capital markets and the positive effect on market valuation due to the company’s inclusion on a US index. However, as an example, inclusion on the S&P 500 Index requires, inter alia, a US-domiciled company, which is assessed based on the jurisdiction of (1) incorporation/registration, (2) its operational headquarters and/or (3) any stock exchange listings. Accordingly, from a structuring perspective, there are different options and strategies to fulfil these requirements, which includes establishing headquarters in the target jurisdiction, performing a flip transaction, reincorporation or redomestication or a reverse takeover.

Devon M Bodoh emphasised that the rules applicable to such restructurings are dynamic and have been recently loosened. Thus, their interplay with the relevant tax rules has to be constantly (re)evaluated.

Case studies

Establishing operational headquarters

The first case study explored the tax consequences related to an emerging technology company in Switzerland/Austria/Australia moving its operational headquarters to Germany/the United Kingdom/the US.

In the case of a company leaving Australia, Elissa Romanin reported that tax residency under Australian tax law is linked to either the details of the company’s incorporation or centre of managerial control. Thus, the entity likely remains resident in Australia unless the statutory minimum number of Australian managing directors is not met (or a treaty tie-breaker applies in favour of the inbound jurisdiction). A loss of Australian tax residency would be treated as a disposal event, with exit tax applicable and the relevant termination of the Australian consolidated group.

In the case of a company relocating to German, Matthias Scheifele remarked that corporate law is of primary importance, since only European Union/European Economic Area (EEA) companies can be migrated to Germany in an identity-preserving manner. In such case, the company would become subject to German corporate taxation pursuant to the customary rules. Non-EU/EEA companies, however, are considered merely a partnership from a corporate law perspective. German tax treatment (qualification as an opaque corporation or as a transparent entity) of such an entity however is unclear and is practically burdened with legal uncertainty. In any case, a German permanent establishment would be created, with the assets (especially intellectual property (IP)) being likely attributed to it based on the significant people function and generally linked to the fair market value. Future dividends would be subject to German withholding tax (WHT) at a rate of 26.375 per cent, which would include strict anti-abuse provisions.

In the case of a company leaving Austria, Clemens Philipp Schindler pointed out that tax residency under Austrian tax law is linked to the place of effective management. In case of a change in the place of effective management (or a treaty tie-breaker in favour of the inbound jurisdiction), exit tax would be triggered, although for EU/EEA inbound cases such tax could be paid in instalments, while in non-EU/EEA inbound cases, an immediate exit tax would apply. Further, there would be an impact on the net operating losses and in regard to the group consolidation regime.

In the case of a company relocating to the UK, Mike Lane pointed out that the company would become a UK tax resident; however, the company’s assets would not be stepped up. In the case of holding companies, this is not necessarily onerous, due to the substantial shareholding exemptions available. Lane remarked that especially in tech companies, there might be practical issues with regard to attribution of value creation factors to jurisdictions (especially considering mobility issues).

In the case of a technology company leaving Switzerland, Reto Heuberger pointed out that Swiss corporate law allows for an identity-preserving change in regard to its country of incorporation. Switzerland also applies the dual approach to a company’s tax residency (related to incorporation or the place of effective management). Two types of exit taxes apply in Switzerland and although the participation exemption would apply in regard to corporate tax, a 35 per cent dividend WHT would generally be due.

In the case of a company relocating to the US, Bodoh highlighted some similarities with post-inverted structures regarding the gravitation pull of the management location and highlighted that the US does not recognise the concept related to the centre of management.

Flip transactions

The second case study explored the tax consequences of an emerging technology company with shareholders in Austria/Germany/Australia flipping to a US or Swiss structure.

In regard to the case involving Austrian shareholders, Schindler remarked that a transaction is considered a contribution to the US company and, for Austrian shareholders, capital gains would crystallise. Further, for the entity itself, the real estate transfer tax (RETT) might be triggered, losses carried forward may be forfeit and special effects might materialise in the case of employee participation.

In regard to the case involving German shareholders, Scheifele pointed out that for non-EU/EEA inbound cases no tax-neutral roll-over is possible and taxable capital gains would apply in regard to German shareholders.

Bodoh elaborated on recent developments regarding the US administration’s perspective on Pillar Two and especially on the application of retaliatory measures in regard to companies/individuals in countries that have implemented Pillar Two (including doubling the tax rates pursuant to Section 891 of the US Internal Revenue Code). The participants discussed the potential scope of such measures. However, it remains unclear whether and how such retaliatory measures would be applied.

In regard to the case involving Australian shareholders, Romanin stated that even though in principle capital gains would arise, roll-over relief might be applicable, which would lead to a deferral of the capital gains. Additional complexity might arise if employee participation applies. Additional implications relate to Franklin credits (no longer available after the flip, leading to a higher WHT burden), IP transfers and transfers of real estate.

In regard to the Swiss inbound case, Heuberger emphasised the importance of the issuance of shares at a fair market value (which could allow for distributions free of WHT in the future). Further, an exemption in regard to the one per cent issuance stamp duty should apply to flip transactions in this context.

Continuation

The third case study explored the tax consequences of continuation for an emerging technology company from the German, Swiss and UK perspective.

For German cases, Scheifele pointed out that straightforward migration out of Germany is very rare due to prohibitive tax implications (exit taxation). Against this background, access to foreign capital markets is either pursued via the issuance of American depository receipts (ADRs) or through the insertion of a foreign holding company (however, this also problematic in US cases, since no tax-neutral roll-over is possible in such circumstances).

For Swiss cases, Heuberger pointed out that continuation without liquidation is possible and companies often remain Swiss tax residents despite migration for corporate law purposes to an offshore jurisdiction.

For UK cases, Lane highlighted current discussions regarding changes in the UK tax treatment of continuation cases. In addition to this, the question of a step-up in basis, especially in regard to UK stamp duty, has to be considered in UK cases of company migration.

Moving into the US

The second part of the panel session focused on migration to the US and special US inversion rules, based on a case study involving a US emerging technology company seeking capital market access (via a capital pool company (CPC) programme).

Bodoh provided an overview of the US inversion rules, with the historical background of the legacy inversion rules. The current inversion rules include the substantial business activity test regarding the inbound jurisdiction and differentiates based on the change of control criterion (especially on the shareholders quota of the old TechCo shareholders in the new entity). In cases that achieve over 80 per cent in terms of the shareholder quota, for US tax purposes, the TechCo remains a US tax resident, despite its migration to another jurisdiction. In the cases that achieve a shareholder quota of between 60 and 80 per cent, the US inversion rules that apply are more nuanced and can deny preferential dividend treatment, which is essential from a capital market perspective. Bodoh concluded with some remarks on the broad application of the US inversion rules (eg, in the case of creditor roll-over in Chapter 11 of the Bankruptcy Code cases).