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In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company.
There are many reasons why a company demerger may be desirable.
For example, a demerger might be undertaken with a view to focusing management on one specific part of the business. Alternatively, a demerger can be carried out to ring-fence liabilities attached to a particular business, or as a precursor to the disposal of a business.
While demergers are usually triggered by a variety of commercial reasons, a business undergoing a demerger will also want to minimise, and ideally eliminate, any tax charges arising on the demerger.
The different mechanisms for achieving a tax efficient demerger fall into three main categories:
The decision as to which demerger mechanism to use will vary and be dependent on the specific facts and requirements of each transaction.
For example, the statutory demerger route cannot apply to non-trading businesses or when arrangements are in place at the time of the demerger to sell the demerged or successor company. In such circumstances, it will be necessary to consider one of the non-statutory demerger routes (i.e. the capital reduction or liquidation demerger options).
A demerger will often involve consideration of a variety of taxes (including capital gains, income tax, stamp taxes and VAT) as well as non-tax issues. A demerger should be carefully structured so as to be as tax efficient as possible whilst obviously still achieving the overall commercial goals. Tax planning in relation to demergers should be undertaken carefully so as to avoid putting the company and its advisers at unnecessary risk.
In some cases, a demerger may be used to divide a business between two separate groups of shareholders. This is known as a partition demerger, and can qualify for some, but not all, of the tax reliefs available to demergers where there is no partition.
Regardless of the demerger route chosen, advance tax clearance should be sought. The need to obtain such clearances should be factored into the transaction timetable for any demerger.
Why Undertake a demerger?
The aim of a demerger must be clearly ascertained in order to determine the ideal route. There are many reasons why a company or group might demerge, including the following:
Choice of demerger route
As mentioned above, there is no single relief from all relevant taxes on a demerger although there are several different tax reliefs which in combination may give a tax efficient result. Tax planning must therefore be bespoke in each situation. Reliefs are not only dependent on meeting certain conditions at the time of the demerger distribution. There are provisions for clawback of relief in certain circumstances in future and so it is crucial to consider the company’s future intentions.
Conditions for tax relief may also be unachievable for commercial or legal reasons and so the starting point for the demerger project should be to obtain a rounded picture of the company’s affairs.
There are three main routes for a demerger ― the statutory demerger option and then two non-statutory demerger options (the capital reduction demerger and the liquidation demerger). Each can offer a tax efficient means of effecting a demerger.
What is a tax efficient demerger?
In order for a demerger to be wholly tax efficient from a UK tax perspective, all of the following requirements must be met:
How can ETC Tax Help?
Demergers are complex and specialist professional advice is key. At ETC Tax, we have extensive experience of all types of corporate restructuring including demergers and are able to make the complex simple…allowing you to concentrate on what you do best.
Call or email us any time or, simply fill out the contact form below and a member of our team will be in touch.