Tax issues at SPAC formation
The design and structure of SPACs incorporate elements of U.S. corporate and tax law that may not fit neatly into frameworks in other countries. Addressing these differences at the time of SPAC formation will improve your ability to make a successful acquisition and help avoid surprises at the back end.
Key issues to consider include:
Location of incorporation of the SPAC
- Incorporating the SPAC outside the U.S. (e.g., in the Cayman Islands) decreases the risk that U.S. anti-inversion rules will apply in the case that the SPAC identifies a foreign target, but increases the risk that the PFIC rules will apply to U.S. investors in the SPAC (see below for more on PFIC and anti-inversion rules).
- But be mindful of Cayman’s reputation—the European Union only recently removed it from a blacklist.
Inadvertent tax residency
- Unlike in many jurisdictions, in the U.S. tax residency is determined by the place of incorporation—e.g., Delaware.
- Other jurisdictions have a central management and control test—e.g., where are the SPAC directors located and from where do they make decisions?
- If you want to use tax residency in the U.K., beware that it’s increasingly questioning if companies are really centrally managed from there; likewise, if you do not wish to have U.K. tax residency, then be mindful when having U.K. directors or holding your board meetings there.
Different tax regimes for share compensation and founder shares
- Unlike in the U.S., some jurisdictions may not respect the founder share “investment” made by the sponsors/founders, and instead tax shares when they are granted and/or converted (potentially resulting in duplicative taxation).
Passive foreign investment company (PFIC) issues for U.S. shareholders in a foreign corporation
- In the U.S., a foreign corporation may be treated as a PFIC: 1) if at least 75 percent of its gross income is passive; or 2) at least 50 percent of its assets produce passive income or are held for the production of passive income using a quarterly averaging test (which may include cash held in the trust account).
- U.S. shareholders of a PFIC must make certain annual elections in order to preserve capital gains treatment and avoid other potentially adverse tax consequences, including upon SPAC merger and thereafter.
Controlled foreign corporation (CFC) rules may also apply to a non-U.S. SPAC and could affect founder shareholders who are U.S. persons.
