Taxation of Cross-Border Mergers and Acquisitions

KPMG INTERNATIONAL Taxation of Cross-Border Mergers and Acquisitions Jersey kpmg.com 2 | Jersey: Taxation of Cross-Border Mergers and Acquisitions Jersey Introduction Recent developments Jersey is a dependency of the British Crown and benefits The EU Code of Conduct on Business Taxation Group from close ties to both the United Kingdom, being in the assessed Jersey’s zero/ten tax system in 2011. The same time zone and having a similar regulatory environment assessment found that the interaction of the zero percent and business culture, and Europe. With its long tradition of rate and the deemed dividend and full attribution provisions to political and economic stability, low-tax regime and economy be harmful. The dividend and attribution provisions sought to dominated by financial institutions, Jersey is an attractive assess Jersey resident individual shareholders on the profits location for investment. of Jersey companies subject to the zero percent rate. As a result of the assessment, legislation was passed to abolish The island has undertaken steps to counter its tax haven the deemed distribution and full attribution taxation provisions image in recent times. It was placed on the Organisation for for profits arising on or after 1 January 2012, thereby removing Economic Cooperation and Development (OECD) white list the harmful element of the regime. The EU Code of Conduct in April 2009. In September 2009, the International Monetary on Business Taxation Group accepted Jersey’s position Fund issued a report in which it commented that financial and submitted to the EU’s Economic and Financial Affairs sector regulation and supervision are of a high standard and Council (ECOFIN) that Jersey had rolled back the harmful comply well with international standards. tax measures and that the remaining zero and ten percent On a cautionary note, due to the limited resources available in tax rates are compliant with the Code of Conduct. ECOFIN Jersey, the government does not encourage labor-intensive formally approved the regime on 19 December 2011. inward investment controlled by non-residents. However, the In 2008, the island introduced a goods and services tax (GST) government does encourage e-commerce and knowledge- to make financing public services less dependent on direct based industries. There are no investment incentives other taxation. The GST regime operates in a similar manner to the than Jersey’s low-tax regime, and Jersey does not provide any UK’s value added tax (VAT) regime. The standard GST rate grants, subsidies or funds for foreign investors. increased to 5 percent (from 3 percent) on 1 June 2011. On 1 January 2009, Jersey introduced the zero/ten tax system for companies. Under this regime, exempt companies were Asset purchase or share purchase abolished and revised corporate income tax rates were introduced, which depend on the activities of the company. A purchase of shares is the most common form of acquisition The general rate of corporate income tax is now 0 percent. in Jersey because there is no capital gains tax in Jersey on The rate of corporate income tax for certain companies with the disposal of shares. From a tax perspective, there are no permanent establishments in Jersey and regulated by the capital gains consequences to a company on the disposal Financial Services Commission is 10 percent. The rate of of its assets. However, the potential recapture of capital tax for utility companies and companies that receive rental allowances and taxation on the extraction of sales proceeds income or property development profits from properties in might make an asset acquisition less attractive to the seller. Jersey is 20 percent. Since most companies pay tax at 0 percent, this may not be relevant in every case. Jersey has established Tax Information Exchange Agreements (TIEA) with numerous countries, including the UK, the United Purchase of assets States and several European Union (EU) countries. These agreements, which apply to all types of taxation, are based on The purchase of assets may give rise to an increase in the the OECD model and have increased Jersey’s reputation as a base cost of those assets for capital allowances purposes. well-regulated jurisdiction with a commitment to transparency This increase is likely to affect the seller because a recapture and an effective anti-money laundering environment. of prior allowances is applied. Since there is no capital gains tax in Jersey, the seller can dispose of inherent goodwill © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. Jersey: Taxation of Cross-Border Mergers and Acquisitions | 3 without direct tax consequences, although the purchaser Goods and services tax would not receive any tax relief for purchased goodwill. In 2008, Jersey introduced a GST regime, which is similar to Additionally, historical tax liabilities generally remain with the the UK’s VAT system and could apply to a transfer of trade and company and are not transferred with the assets. assets. GST applies at the standard 5 percent rate and must be charged on the supply of goods and services in Jersey that Purchase price relate to a trade carried on by a taxable person. Some types of For tax purposes, the consideration paid is apportioned on a supply, such as housing and medical prescriptions, have a GST reasonable basis between the assets acquired. The purchase rate of 0 percent. Others, including certain financial services, agreement should specify the allocation, which is normally postal services and medical supplies, are exempt. acceptable for tax purposes, provided there is a commercial The sale of assets of a GST-registerable business is subject to rationale behind the apportionment. No specific statutory GST at the standard rate. However, the transfer of a business rules affect how the purchase consideration is allocated. as a going concern is outside the scope of the charge to GST, However, in accordance with Generally Accepted Accounting provided (among other things): Principles (GAAP), stock would normally be valued at the lower of cost and market value. Jersey does not have its own • there is no significant break in trading GAAP regulation, so companies can chose to report under • the assets are used by the purchaser with the intention of other GAAP regulations such as those of the UK and the US. carrying on the same or similar business as the seller Goodwill • the assets are sold as part of the transfer of a business as a going concern. Any goodwill generated on acquisition is held on the balance sheet as an asset. No tax relief is available for the subsequent No specified quantum of assets must be sold to meet the amortization of the asset to the income and expenditure going concern standard. account. Certain types of business in Jersey within the finance sector can apply for International Service Entity status, which Depreciation puts them outside the scope of GST. These companies are For tax purposes, no deduction for depreciation charges is generally deposit takers or trust or fund services businesses, allowed. Instead, tax relief is given for the cost of plant and and the majority of their business is not the provision of goods machinery used in the provision of the trade at a specified and services to Jersey residents. rate by means of capital allowances. Expenditure on and disposal receipts arising from plant and machinery are Transfer taxes pooled and a capital allowance of 25 percent per year is Stamp duty of 0.5 percent is payable on Jersey land applied on a reducing balance basis against taxable profits. transactions up to the value of 50,000 British pounds (GBP). A special allowance rate of 10 percent per year is allowed for For land transactions of more than GBP50,000, scale rates horticultural greenhouses. Capital allowances are not available apply up to a maximum of 5 percent. The sale of shares in a for expenditure on premises, such as industrial buildings, company that owns Jersey land might fall within the ambit of shops, hotels and offices. the Taxation (Land Transactions) (Jersey) Law. This law seeks to treat the sale of shares in a company that holds land in the Tax attributes same way as a land transaction. Tax losses and capital allowance pools in the target company remain with the company or are extinguished. They can only be used to relieve profits of the trade of the target company after the transaction. They cannot be transferred to the purchaser. © 2014 KPMG International Cooperative (“KPMG International”). KPMG International provides no client services and is a Swiss entity with which the independent member firms of the KPMG network are affiliated. 4 | Jersey: Taxation of Cross-Border Mergers and Acquisitions Purchase of shares The acquisition agreement should indicate whether the purchaser or the seller has the right to use the target’s pre- As there is no capital gains tax in Jersey, acquisitions of acquisition tax losses and whether there is to be any payment shares are common. The purchase of a target company’s for the use of pre-acquisition tax losses by the purchaser. shares does not result in an increase in the base cost of the company’s underlying assets. It is also possible to acquire Crystallization of tax charges shares in a Jersey company through a public takeover offer, provided the shares of the target company are traded on a There is no capital gains tax in Jersey, so no exit charges stock exchange in the UK, Channel Islands or Isle of Man or arise on gains inherent in the business assets of the acquired the company is public (or considered public). company on change in ownership.

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