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Stamp Duty and the Delaware Flip
The US team at MBM has written extensively on the “Delaware flip” process and you can read more here and here. While the Delaware flip can offer significant benefits, including access to US investors, markets, and legal protections, it is not without its complexities and potential pitfalls. This article explores one particular and often overlooked part of the planning and execution of a Delaware flip: relief for stamp duty.
When executing a Delaware flip, one of the key concerns is ensuring that the new US-based parent company qualifies for Section 77 stamp duty relief in the UK. This relief is available when a company undergoes a share reorganisation, such as a Delaware flip, where the new US-based parent company (typically incorporated in Delaware) acquires the shares of the existing UK company.
Stamp Duty
Stamp duty is a tax that applies to the transfer of shares in UK companies. Typically, when shares are transferred, a 0.5% stamp duty on the transaction's value is payable by the buyer. In a Delaware flip, the shares of the UK company are transferred to the new Delaware entity, potentially triggering this tax for the Delaware parent company.
This is where Section 77 of the Finance Act 1986 comes into play. Section 77 provides relief from stamp duty in specific circumstances, particularly in corporate reorganisations like a Delaware flip.
Understanding Section 77 Relief
Section 77 stamp duty relief can apply when a company’s shares are transferred to another company in exchange for the issuing company's shares. For the relief to be granted, certain conditions must be met:
- The transaction must be a bona fide reorganisation: The transfer must be part of a genuine corporate reorganisation, where the old company’s shareholders are issued shares in the new holding company in a proportion that mirrors their original holdings.
- No cash consideration: The shares must be transferred in exchange for shares in the new company, with no cash or other consideration involved.
- Share-for-share exchange: The transaction must be a share-for-share exchange, meaning the shareholders receive shares in the Delaware parent company in exchange for their shares in the UK company.
If these conditions are met, the acquiring company can claim Section 77 relief, avoiding the stamp duty that would otherwise apply to the share transfer.
Risk of Losing Section 77 Stamp Duty Relief
The main risk of losing Section 77 stamp duty relief arises if the new holding company immediately completes an investment deal following the Delaware flip. The reason for this is that the relief is contingent on certain conditions, particularly the "bona fide reorganisation" requirement.
The reorganisation must be structured in a way that ensures the new holding company is not merely a vehicle for avoiding stamp duty but serves a genuine commercial purpose. If the new holding company immediately engages in an investment transaction, it could be argued that the reorganisation was not genuinely aimed at simplifying the corporate structure or facilitating business operations but rather at avoiding stamp duty on a subsequent transaction.
Factors That Could Trigger the Risk:
- Timing of the Investment: If the investment occurs immediately after the flip, HMRC (HM Revenue and Customs) might scrutinise the transaction more closely. A short interval between the flip and the investment could suggest that the flip was primarily done to avoid stamp duty.
- Substance of the Investment Deal: The nature of the investment deal matters. If it is a significant equity transaction, merger or acquisition, this could raise red flags with HMRC. They might view it as evidence that the Delaware flip was a precursor to an investment event, designed to circumvent the usual tax obligations.
- Commercial Justification: If there is a strong commercial reason for both the flip and the immediate investment, the risk may be mitigated. The company should document the strategic or operational reasons for both actions clearly. The more robust the business case for the reorganisation and the investment, the better.
- Documentation and Communication with HMRC: Proper documentation of the rationale for the Delaware flip and the timing of the investment is critical. Transparent communication with HMRC, possibly through advance clearance, can also reduce the risk.
Mitigation Strategies:
- Delay the Investment: One approach to mitigate the risk is to delay the investment deal until a reasonable period has passed following the Delaware flip. This delay would demonstrate that the flip was not solely for tax avoidance.
- Document the Business Purpose: Ensure there is clear documentation of the business reasons for both the Delaware flip and the subsequent investment. This could include board minutes, legal opinions and strategic plans.
- Seek Advance Clearance: In some cases, it might be prudent to seek advance clearance from HMRC to confirm that the planned reorganisation qualifies for Section 77 relief. This could provide assurance that the relief will not be lost.
In summary, while there is a risk of losing Section 77 stamp duty relief if an investment deal is completed immediately after a Delaware flip, this risk can be managed through careful planning, timing and documentation.
