International aspects of demergers

Chris Holmes and Ross Robertson in our London office co-authored “International aspects of demergers”, published by Tax Journal on 16 June 2023.

Demergers are one of the most complex types of corporate transaction, especially when they involve international aspects such as non-resident companies, companies registered overseas, companies with overseas assets or trades, or non-resident shareholders. For non-resident shareholders, the main aspects requiring consideration are their potential liability to UK tax, and their exposure to local tax in their jurisdiction of tax residence. For companies registered overseas, the main issue is that their corporate governance falls under foreign corporate law provisions, so a demerger will not be carried out under UK legal principles for which UK tax law is written. For non-resident companies carrying out a demerger, care is required to look not just at the company’s UK and foreign tax position, but also the consequential impact on UK shareholders.

The article includes sections on:

Overview of demergers
Non-resident shareholders
Companies registered overseas
Non-resident companies
UK companies with overseas assets and trade
Cross-jurisdictional demergers
Mixed groups with mixed shareholders
Demerging investments

Demergers – arguably one of the most complex types of corporate transaction – become even more complicated when international elements are involved. International aspects do carry additional risk, but they can also create opportunities. The important point is that the implications of undertaking a demerger with international aspects must be fully and specifically considered.

There are two aspects that need to be considered for non-resident shareholders:

Their potential liability to UK tax; and
Their exposure to local tax in their jurisdiction of tax residence.

Of the two, the latter is usually the most critical. Foreign tax may also be an issue for individuals who are subject to tax in their home nation by reason of citizenship rather than residence; for example, US citizens and green card holders (referred to in this article as ‘dual taxed shareholders’).

The main issue with the demerger of a company registered overseas is that its corporate governance falls under foreign corporate law provisions, so a demerger will not be carried out under UK legal principles. In particular, the corporate law of many jurisdictions includes provisions that allow a company to demerge as a single legal step, literally allowing it to split up into two or more new companies.

Where the company carrying out the demerger is resident outside the UK, we must look not just at the company’s UK and foreign tax position, but also the consequential impact on UK shareholders.

For UK companies with overseas interests, the most important point is to confirm the foreign tax position for any foreign assets that may be transferred at some point through the transaction. Local tax advice is therefore required.

By far the most interesting cases, at least for the authors, are those that involve multiple jurisdictions for both companies and shareholders. Balancing the various multiple jurisdictional tax issues can certainly be challenging.

It will also be important to assess whether the demerger impacts upon the availability of tax attributes (such as tax losses) for the company whose trade or business is split and the company that is in receipt of that trade or business.

Demergers are an important and common type of transaction for companies throughout the world. International aspects do complicate matters and need very careful consideration, but with appropriate international assistance, solutions can usually be found.