Acquisition of existing foreign group

"During the past few years, whilst building up the high quality optical lens side and also the magnifying glasses for the consumer market worldwide, Polycon Lens Company has been developing export sales of camera lenses to a foreign manufacturer, the Visitec Corporation, which purchases the Ienses for low price instamatic cameras. This has developed into a significant proportion of Polycon Lens Company’s turnover but Mr Holmes understands that there is a possibility that the foreign manufacturer will be forced into liquidation, mainly because of inadequate turnover and high financing costs.

Mr Holmes considers that the distributors and retail outlets, which are buying the group’s magnifying glasses worldwide, may also be approached by the sales subsidiaries to purchase the instamatic cameras produced by Visitec Corporation. The expensive short-term financing of Visitec Corporation will be repaid on acquisition by long-term lower cost finance obtained by Polycon Lens Company. Mr. Holmes therefore considers that an acquisition of Visitec Corporation on currently advantageous terms will enable his sales subsidiaries to achieve maximum turnover and a high profit potential for the cameras, whilst at the same time preserving Polycon Lens Company’s export sales of camera lenses.”

The acquisition of Visitec Corporation may require some tax planning considerations, particularly with regard to the deductibility of interest costs on loans raised to make the acquisition, There may be certain unusual steps that have to be adopted in order to ensure such deductibility of interest charges; one may also attempt to secure the deduction of interest charges against the taxable profits of Visitec Corporation, the company being acquired, by means of consolidated returns.

If Visitec Corporation is resident in a country, which allows consolidated returns for tax purposes; a local holding company can be formed in the same jurisdiction to borrow the funds to acquire Visitec. The interest payable on such sums may then be consolidated with the operating profits of Visitec Corporation to allow full for such interest. Borrowing may also reduce foreign exchange exposure in the same currency in which profits are generated.

It may be that Visitec Corporation has substantial assets which appear in its balance sheet at low cost, but Polycon Lens Company wishes to transfer these assets to a separate holding company formed for the purpose of reflecting the acquisition costs in the assets being acquired, Country I's tax legislation may provide for the non-recognition of any capital gain inherent in such a transfer.

The future dividend flow must also be carefully considered and the relief for foreign taxation incurred in Country I against the tax payable in Country A is discussed in Section 12 below. For cash flow purposes, it is always desirable to reduce the initial withholding taxes levied on the payment of dividends from subsidiary companies, and if the impact of foreign withholding taxes and direct corporate tax on underlying profits is to create a tax rate in excess of domestic taxation levied in Country A, consideration should therefore be given to separating the investment in Country I into a separate holding company if this will reduce the foreign withholding taxes levied on dividend flow. Alternatively, one may have to fragment the shareholding between related companies to achieve the lowest foreign withholding taxes.

Date: 2015-01-29; view: 691