Taxation in Distressed Situations: European Perspectives
In this edition of the Weil Tax Insight Series of podcasts, Jenny Doak and Benjamin Pique of Weil, Gotshal & Manges discuss taxation in distressed situations with Stuart Pibworth, each of whom are tax attorneys, moderated by Devon Bodoh, head of international tax at Weil. Jenny details the UK perspective while Benjamin describes the French point of view. Together, they explore the complexities of taxation in distressed situations in international restructurings.
Recent key tax themes in the UK and France in distressed scenarios
The UK
- Debt releases – groups that have too much debt have to manage with the tax consequences of amending or releasing that debt.
- Instruments that are neither debt nor pure equity – warrants or convertibles.
- Change in control – restructuring very often involves a change in control of the debtor companies.
France
As with the UK, debt release is key, but in France a broad range of exemptions are not relied upon. Often debt is swapped for equity.
A recurring challenge in France is identification of the appropriate structure.
Tax exemptions
In the UK, exemptions include:
- debt for equity;
- releases; and
- the corporate rescue exemption.
In France, reliance is not placed on the exemptions noted above in insolvency cases. There are two mitigating factors:
- French insolvency proceedings; and
- rules which provide that the gain made by the debtor may be exempt.
Further detail on French exemptions and more, with respect to tax in distressed situations, can be found in a publication by Weil.
In the UK, to fall within the debt for equity exemption, there needs to be a formal release by the creditor.
Fees in France can be subject to withholding tax, as well as VAT.
VAT is usually a concern in the UK, but there are no withholding tax concerns on fees in the UK.
Warrants and contingent value rights
Warrants can be inefficient. There are two ways, broadly, in which warrants can be taxed for an issuer in the UK:
- upfront charge by the issuer company; or
- derivative contract rules.
By contrast, contingent value rights are much simpler – more like equity – provided that they are not qualified as options.
There may be potential tax impacts for the issuer upon the forfeit or cancellation of warrants in France if the warrants are not linked to shares.
In France, the stress point could be around withholding tax, whereas in the UK the concern is primarily around corporation tax.
New rules
The implementation of Pillar Two, in the context of restructuring, basically looks at whether the effective tax rate is below 15%. Where there is a debt release that triggers an accounting credit, but an exemption from tax applies to that credit, then in theory the effective tax rate on the particular item is 0%. If it is significant enough, it could drive the effective tax rate of the group down. In practice, the existing rules do not cover all types of debt restructuring.
“Pillar Two: The bane of every tax professional’s life.” (21:54)
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